When Should Physicians Buy Whole Life Insurance?

Let’s clarify: Whole Life Insurance is Contra-Indicated for Most Physicians!

But what are the INDICATIONS for whole life insurance? When should you, as a physician, buy whole life insurance? Despite all the vitriol on the web, there are times when it is in your best interest to purchase and hold whole life insurance for your whole life. What are those indications?

Before you use insurance products, make sure you have your other bases covered because there likely are better uses for your money early on in life than insurance products. Cover the basics. Then invest. Then, consider whole life insurance if indicated.

Indications for Whole Life Insurance for Physicians

WCI has a select list of when whole life insurance is appropriate for physicians:

An ILIT (Irrevocable Life Insurance Trust) to reduce estate tax
Liquidity at death for an otherwise illiquid estate (i.e., real estate or a ranch)
Special Needs Trust
Key Man Insurance
Single life annuity with life insurance (so-called Pension Maximization)
In combination with a CRT as an estate strategy
Infinite Banking (Bank on Yourself)
Asset Protection

Of course, there are caveats for any of the above. We will get to those and discuss the indications for whole life insurance more. Before we do, let’s clarify what we are talking about.

Everyone knows what term life insurance is. What are the basics of whole life insurance for physicians?

Permanent Life Insurance For Physicians

First, Whole Life Insurance is only one type of Permanent Life Insurance. There is also Universal Life Insurance. Since most folks don’t know the difference, I use “whole” life insurance when discussing any life insurance that is not term.

So, if you want life insurance to insure your life for a while, get term life insurance. This is what 95% of physicians need. If you die before your family is financially independent, term life insurance will help pay your family’s bills.

Another way to think about this is that once you have enough money to retire, you no longer need life insurance.

So, to understand whole life insurance, we need to understand 1) why you might want a death benefit that lasts beyond retirement and/or 2) what other features whole life insurance has as far as bells and whistles.

Understanding who needs a death benefit after retirement is pretty straightforward. Figuring out the bells and whistles, on the other hand, can get confusing. Remember, the insurance industry tries to create this confusion, so you don’t understand what it costs. Let’s start by looking at some of the particulars of permanent life insurance to understand how complicated they are.

Whole Life Insurance for Physicians

Whole Life Insurance is the simplest form of permanent life insurance. That said, it is 100x more complicated than term life. You can get dividends, you can have paid-up additions, and you can blend it with term insurance. It chops, cuts, and slices! And that is the problem: complexity!

I suggest you view Whole Life Insurance as a Bond-Alternative. If you want Whole Life Insurance and you take more risk with your equities as a result, you might be well rewarded. This is especially true as whole life insurance is not correlated with the stock market!

Whole life insurance for physicians: When you want something safe and stodgy, and you are already doing everything else just right, you might consider whole life insurance!

Universal Life Insurance for Physicians

Universal life has many more flavors: guaranteed, indexed, variable… These products are tremendously complex, and buyer beware. You hear insurance agents criticizing other insurance agents about how they set up their policies.

Except for guaranteed universal life (which doesn’t pay much in commissions), it almost seems that these policies were designed to be sold rather than bought.

Why does Permanent Life Insurance have a Bad Reputation?

“It is sold rather than purchased.”

These products are complex, confusing, and not infrequently inappropriately sold to folks who have much better uses for their income.

As an educated consumer, vote with your feet! Understand when permanent life insurance is appropriate for you. Never let Whole Life Insurance be sold to you. Instead, if you need it, go out and buy it from an independent insurance agent.

Decisions Regarding Physician Whole Life Insurance

So, when might an education physician find permanent life insurance appropriate?

Certainly, you must be out of debt and fully funding tax-deferred and tax-free accounts. You must have extra income and a plan.

Also, recognize the risks in retirement. Longevity, inflation, health care, long-term care, market, sequence of return, loss of a spouse, legislative risk… the list is long!

Finally, while mitigating these risks, money earmarked for whole life insurance does not come from equity but from fixed income.

Permanent life insurance is not an investment but can replace some of your safer money earmarked for volatility-dampening or maintaining wealth. This is often misunderstood, as financial bloggers compare stock market returns to those of life insurance policies.

Let’s break down some of the components of permanent life insurance to see how the individual parts are used.

Components of Permanent Life Insurance

Briefly, let’s look at some features or components of permanent life insurance.

Death Benefit

Frequently, appropriate uses of permanent life insurance revolve around the death benefit.

Whole life and universal life feature death benefits. You can adjust the death benefit, so consider vanilla whole life insurance and guaranteed universal life insurance if you are all interested in the death benefit.

We are trying to answer the question: when must you have a bolus of tax-free money regardless of whether you die tomorrow or when you are 101 years old?

The following uses center around the death benefit:

An ILIT (Irrevocable Life Insurance Trust) to reduce estate tax
In combination with a Charity Remainder Trust as an estate strategy
Liquidity at death for an otherwise illiquid estate (i.e., real estate or a ranch)
Special Needs Trust
Key Man Insurance
Single life annuity with life insurance (so-called Pension Maximization)
Widow/Wider Tax Penalty Prevention

Cash Value

Cash value is useful for taking tax-free withdrawals or loans from your policy. Loans may subject you to interest payments. Both affect your death benefit, so understand the difference between policies focused on cash value vs death benefits.

Whole life and universal life can build cash value. The question we are trying to solve here is: when is it worth paying extra for the bells and whistles you only get with life insurance? The life insurance lobby has been around for a long time and has built-in tax efficiencies into tax laws that one must consider. Under no circumstances MUST you have whole life insurance for cash value accumulation, but there is a certain type of person who enjoys “being their own bank.” These people tend to be real estate-focused investors who eschew the stock market as “risky” and don’t understand that just because your stock goes down, you haven’t lost any money. I don’t want to isolate and call out too many people here because we all have our flaws.

But there are many ways to be a successful investor. Can cash-value life insurance help? Sure. Unfortunately, there are a separate set of risks and complications when you add whole life insurance to the mix. Here, we scratch the surface, but back to cash value.

Not infrequently, a policy may have a minimum death benefit and maximal cash accumulation features. This allows “stuffing” of the policy for tax-deferred growth of after-tax money. These policies are sometimes compared to Roths, as there is tax-deferred growth, and “income” from these policies is tax-free if done appropriately. As a bonus, there are no income limitations, and you can stuff as much money into these policies as you want.

If you have extra after-tax income and don’t want additional stock market risk, a cash-value life insurance policy may be appropriate for additional retirement savings. Remember, these policies replace the fixed-income part of your portfolio, not the equity part.

The following uses center around the utilization of cash value features:

Infinite Banking (Bank on Yourself)
Asset Protection
Buffer Asset to Prevent Sequence of Return Risk

Additional Caveats

With portability (the ability to port your spouse’s exemption at their death to your estate) pushing a couple’s estate tax exemption above $13.61M, few have estate tax issues. As everyone believes the estate tax will come down in the next few years, whole life insurance inside an ILIT may become popular again. This is an excellent use of whole life insurance for those fortunate enough to have an otherwise insoluble estate tax problem.

Pension Max and Infinite Banking work OK for some. They are sold with very glossy brochures—you know, the more gloss, the more Shinola. Ensure you understand these schemes very well before signing on the dotted line. You are signing up for life, though, unfortunately, most people drop their whole life insurance (at a great loss) after just a few years.

Asset protection laws for permanent life insurance vary by state. Learn how physicians can safeguard their assets.

On the positive side: almost no one can argue with permanent life insurance for liquidity needs and key man insurance. This is just an excellent use for whole life insurance!

In addition, life insurance is perfect for funding a trust. It is a great funding source if you need a trust for protection and control (say, creditor issues or spendthrift heirs). IRAs can fund trusts, but extreme care is required to prevent the trust from blowing up and causing immediate taxation of the pre-tax money at trust tax rates. This is much more complicated, given the 10-year rule and the death of the Stretch IRA.

And if you have a Special Needs Trust, it used to be funded only with after-tax accounts or life insurance. Since disabled folks are now eligible designated beneficiaries and you can Stretch an inherited IRA inside a special needs trust, IRAs (when carefully designed) can now be used to fund special needs trusts and whole life insurance!

Decisions, Decisions

Whole or Universal Life Insurance is not appropriate for most people.

These products are complex, confusing, and not infrequently inappropriately sold to consumers who have much better uses for their money. This is a scar on the insurance industry that is difficult to forget.

But the same could be said of every other part of the investment world. Brokers charging 5% front loads… 401k plans with outrageous fees… variable annuities sold inside tax-deferred accounts… the list goes on and on when “suitable” is good enough.

Conclusion- Indications for Physician Whole Life Insurance

Permanent life insurance has a bad reputation.

There are appropriate uses for permanent life insurance and all insurance products. Understand the indications for a permanent product, and understand that the sales process should be ripe with education and comparison of products.

Commissions will be paid, and asking your salesman what different commissions are on other products is not inappropriate.

Only after you understand the indications for permanent life insurance should you put your money to work.