Whole Life Insurance for Physicians

Whole Life Insurance for Physicians: Indications and Contra-Indications

When Should Physicians OWN Whole Life Insurance?

White Coat Investor is known for his vitriolic writing regarding whole life insurance. And he is right most of the time! Let’s get this straight: Whole Life Insurance is Contra-Indicated for Most Physicians!

But what are the INDICATIONS for whole life insurance for physicians? When should you, as a physician, own whole life insurance? Yes, 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?

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 in a bit. Before we do, let’s get clear 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 off, 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 I am talking about any life insurance that is not term.

So, if you want life insurance to actually insure your life for a period of time, 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 of thinking about this: Once you have enough money to retire, you don’t need life insurance anymore!

So, in order 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 straight forward. Figuring out the bells and whistles, on the other hand, can get confusing. Remember, the insurance industry tries to make these confusion so you don’t understand what all it costs you. Let’s start looking at some of the particulars of permanent life insurance to begin to understand how complicated they are.

Whole Life Insurance for Physicians

Whole Life Insurance is 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, 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 think about 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 the way they set up their policy.

With the exception of guaranteed universal life (which doesn’t pay much in commissions), it almost seems like these policies were set up 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 spouse, legislative risk… the list is long! See here for retirement issues especially for Physicians.

Finally, know that while mitigating these risks, money earmarked for whole life insurance does not come from your equity goals, rather from your fixed-income ones.

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 all you are interested in is the death benefit.

The question we are trying to answer: when must you have a bolus of tax-free money regardless of if 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 Reminder 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 of policies focused on cash value vs death benefits.

Whole life and universal life can build cash value. The question we are trying to solve for here: when is it worth it to pay 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 persons who enjoys “being their own bank.” These kind of people tend to be real estate focused investors who eschews 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, indeed, we all have our flaws.

But there are many ways to be a successful investor. Can cash value life insurance help? Sure. There are, unfortunately, a whole separate set of risks and complications when you bring whole life insurance into the mix. Here, we just scratch the surface. But back to cash value…

Not infrequently, a policy may have minimal death benefit and maximal cash accumulation features. This allows “stuffing” of the policy for tax-deferred growth of after-tax money. These types of 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 you don’t want additional stock market risk, a cash value life insurance policy may be appropriate for additional retirement savings. Remember, these policies are replacements for your fixed-income part of your portfolio, not the equity part.

The following uses center around utilization of cash value features:

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

Additional Caveats

With portability (ability to port your spouse’s exemption at their death to your estate) pushing a couple’s estate tax exemption above $23M, 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. I would just make sure you understand these schemes very well before you sign 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 physician’s 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. If you need a trust for protection and control (say creditor issues or spendthrift heirs), life insurance triumphs as a funding source. 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 that it should only be funded 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 trusts, IRAs (when carefully designed) now can be used to fund special needs trusts as well as 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 get 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. Enough already!

Conclusion- Indications for Physician Whole Life Insurance

Permanent life insurance has a bad reputation.

There are appropriate uses for permanent life insurance, however, just as there are appropriate uses for 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 it is not inappropriate to ask your salesman what different commissions are on different products.

Only after you are happy you understand the need and the intent of permanent life insurance, should you put your money to work in permanent life insurance.

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5 Comments

  1. I am glad to see that you have a link (which I clicked on and just skimmed; but, will go back and read in detail) for “bond alternatives” as my spouse and I have a large amount of cash value in our 6 Northwestern Mutual whole life polices.

    For the past several years, I have been using each policy’s annual dividend to pay the annual premium and then have the excess dividend paid to us in the form of a “tax free” check…..4 of the 6 policies have reached a zero cost basis and so, now, these 4 policies’ excess annual dividends are being used to purchase “paid up additions”.

    And while, I don’t formally incorporate either the cash value or the death benefits of these 6 policies into our target asset allocation, I am aware that including one or the other would make our actual asset allocation to be more conservative.

    Thanks for another great article…….still hoping that you would add a date to each blog

    • Thanks for the comment. By the way, you can tell the date of the blog by the date of the comments!

    • You are so lucky man that your Northwestern Mutual “advisor” did you right. Mine was a high school buddy of mine who sold me a $1mil policy on me and same policy to my wife when we were still in 360K of medical school debt, luckily he did encourage us to maximize retirement accounts but not doing backdoor roth as he told me whole life was like a Roth. 7 years later I’m was in 31K of credit card debt trying to keep up with the whole life premiums, had to 1035 exchange the policies into low cost variable annuities to preserve our cost basis of a 25K loss on each policy 🙁 Lost $50k in total. 7 years into the policy the dividend didn’t even max out the paid up additions yet, so was paying the premium of 14k plus another thousand or so extra to get to the MEC limit, and could not keep up.

      I am a huge proponent of not getting rid of whole life, but to limit the commission on this product to prevent more victims like me. It worked out for you S J, but sounds like you bought your policies, while mine were sold. I was duped, and I don’t think any doctor should deal with this and be able to focus on their patients and families.

  2. Great article.I think permanent life insurance do have a place in overall financial picture,as proven by S J above.I did a 1035 exchange to Variable annuity in my non- qualified account,after my needs did not justified paying more premiums.

    I do have a question about using indexed annuity most probably variable v/s fixed.The main point along with the contract is the insurance company’s reliabiliy of delivering the contract when needed.
    What kind of ratings or criteria you use to pick the company? Thanks.

    • Right, there is also some insurance at the state level if your insurance company goes under. I’m not sure that has happened in the last 100 years, though. Pick “A” or better rated companies!

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