If you’re like many physicians, you probably purchased some sort of term or permanent life policy early in your career and haven’t revisited your coverage since. The question you need to ask yourself is whether or not your life and circumstances have substantially changed since then. It’s important to review your existing coverage, not only to ensure that your family can replace your income, pay off your mortgage, and finance future education expenses, but also to be certain you’re getting the most out your existing policies. Much like life, policies change over time, and you should want to know:
- Am I getting the maximum coverage for the premium I’m paying?
- Are there beneficial features available today that didn’t exist when I bought my policy?
- Have prices decreased so that I can get the same amount of coverage for less money?
- Are my beneficiary designations up to date?
Each of these questions can be quickly and easily answered by sitting down with your advisor for a quick policy review. The universe of specialty insurance products and carriers catering to the needs of high-income earners has grown exponentially over the years. Having a trusted advisor who can objectively assess your particular situation and needs and make thoughtful recommendations can be an invaluable asset.
Look beyond income replacement
According to Michelle Hughes, an advisor with SunTrust’s Physician Specialty Group, “When most of us think about life insurance, our first inclination is to focus on it as a means of protecting our family in case we die—as an income replacement strategy. But when structured properly, a permanent life policy can actually serve a multitude of diverse purposes,” including the following:
- Maximizing wealth transfer – From a tax perspective, one of the most effective estate planning strategies involves the use of an irrevocable life insurance trust (ILIT). By purchasing a life insurance policy held in an irrevocable trust, you’re able to minimize both income and estate taxes, while using the policy’s death benefit leverage to enhance the legacy you leave for your beneficiaries. Keep in mind that even though the 2017 tax law increased the individual estate and gift tax exemption to $11.4MM, barring legislative action the exemption will return to an inflation-adjusted $5MM beginning in 2026.
- Providing estate settlement liquidity – Life insurance can also provide much needed liquidity to your beneficiaries when settling your estate. This can be particularly important for physicians who have extensive illiquid holdings such as investment real estate or private equity. Providing your beneficiaries with liquidity outside of the probate process can protect them from having to fire sale an illiquid asset at less than market value.
- Protecting your practice equity – If you’re a partner in your practice, a great deal of your personal wealth will be tied up in the considerable equity you’ve built. Without a properly structured buy-sell agreement funded with life insurance, however, both your family and your partners could face financial hardship. In the event of your death, the insurance proceeds ensure the necessary funds for your partners to purchase your ownership interest and provide additional liquidity for your surviving spouse and/or beneficiaries.
- Accessing additional tax deferral – Along with death benefits, permanent life policies allow you to amass a substantial amount of tax-deferred savings over time in the form of the policy’s cash value component. This can provide you with important retirement income and planning benefits during your lifetime; offering tax-deferred growth, potentially tax-free distributions, as well as the flexibility to take cash withdrawals or policy loans if needed.
- Furthering your philanthropic legacy – For those who have a deep charitable drive, life insurance can serve as a means of providing an impactful legacy to an organization you passionately support, while providing tax benefits to your estate and beneficiaries. Structured properly, you can even use the combination of a charitable trust and an ILIT to replace the wealth you leave to charity with additional funds for your beneficiaries.
Does premium financing make sense?
Because many physicians rely heavily on real estate (an illiquid asset) to build their wealth, it can present significant liquidity challenges when looking to fund a large life insurance premium. There are, however, a variety of ways to go about funding your premiums when purchasing a life insurance policy – from paying out of pocket to using leverage as a financing method. Your advisor can help you explore the pros and cons of each approach to find the solution that best aligns with your current circumstances and future goals.
Revisit your long-term care assumptions
Any discussion of insurance strategies would be incomplete if it did not touch on long-term care. As physicians, day in and day out you see firsthand how emotionally and financially devastating a major healthcare crisis can be. We all tend to rationalize by saying things like “I can put this off a little longer. I don’t need to think about it yet. Or better yet, it just won’t happen to me.” Physicians, however, know the facts: 70% of adults who reach age 65 will require some form of long-term care during their life.
“Unlike years ago, where you had limited choices, in today’s world where people are living longer and needing care, the landscape of options has broadened. It’s no longer a choice between purchasing a traditional LTC policy or self-funding those costs out-of-pocket,” points out SunTrust advisor Kevin Loftin. “Today there are a variety of solutions to help protect your assets from being eroded by long-term care costs, including hybrid life and LTC policies, as well as LTC and chronic illness riders that can be added to permanent life policies.”
Not only do these new options allow you to preserve unused LTC benefits as a death benefit for your beneficiaries rather than lose them, they may provide a guarantee that premiums won’t increase and afford more flexible premium payment options. In addition, they also provide you or your estate with a means to protect the capital you’ve invested and worked hard for.
When it comes to insurance, there’s no one-size-fits-all solution or universal rules of thumb (e.g., insurance should provide 10x your annual income). Everybody’s situation is unique, and your insurance coverage should be tailored to reflect that fact. Even if you are reluctant to get locked into an irrevocable solution, your advisor can help you explore strategies (such as a Lifetime Access Trust) that provide protection while preserving a degree of flexibility to pivot should tax laws or your personal situation change.