Planning for the future involves taking into account all of life’s events and putting the financial pieces in place to ensure that they happen as they are envisioned. Proper planning also involves the recognition that life happens and that unforeseen events can disrupt the best laid plans. Most physicians don’t envision themselves dying prematurely and many would prefer not to consider the matter. The reality is that, without a sound life insurance plan in place, the family, or the business, or the estate could suffer catastrophic consequences.
Life insurance is more than planning for the security of one’s loved ones. Its unique properties can provide the needed solution in many difficult financial situations.
The most important purpose of life insurance is to ensure that family survivors are able to replace lost income, meet their immediate cash needs and still achieve important financial goals such as a college education.
Careful consideration should be given to the income needs of the surviving family, including living expenses, child care needs, future education costs, and the ability of the surviving spouse to earn a meaningful income.
The death of one of the heads of the family typically results in several immediate cash needs such as funeral costs and unpaid medical bills. In most cases, there are also outstanding mortgages and debts that, if paid in full, could reduce the surviving family’s financial burdens. Estate settlement costs such as probate expenses, attorney fees and death taxes may also be due.
Life insurance can play a critical role in addressing many other financial issues.
For the business owner, it can ensure that the business is protected against the loss of a key employee. It can also provide the capital needed to buy out the family members of a deceased business partner. There are also instances when a family business is passed on to active family members and life insurance can be used to equalize the inheritance for non-active members.
For the charitably inclined, life insurance proceeds can be gifted directly to a charity, or it can be used to replace the value of a gifted asset such as property.
Life insurance is also the means for paying estate taxes and settlement cost. With estate taxes as high as 50%, a large, unprotected estate could be decimated resulting in the liquidation of valuable properties or a business.
Term Life Insurance: Low cost insurance that protects needs for a known period of time such as during the dependency years of children. Yearly renewable term has increasing premiums for a level death benefit. Level premium term provides level death benefit coverage, and decreasing term has a level premium with decreasing protection.
Whole Life Insurance: A permanent form of life insurance used for long term contingency planning where the need for life insurance will likely continue. It can be available to pay for a spouse’s income for life, provide estate liquidity and even provide supplemental retirement income. Whole life policies require a fixed level premium to pay for level coverage that will not expire as long as premiums are paid.
Universal Life Insurance: Another form of permanent insurance that offers more flexibility in premium payments and death benefits. It has a separate cash value account with competitive interest rates that can be accessed through loans or withdrawals (subject to charges and possible taxes). Premiums are level and can be adjusted based on the performance of the cash value account.
Variable Universal Life Insurance: Similar to universal life except that they have separate, managed accounts that invest in stock or bond portfolios. These policies are suitable for those who are knowledgeable with investing and understand investment risk. The premiums and coverage are level but can be adjusted based on the performance of the underlying accounts. Should the accounts not perform well, premiums could increase and account values could decrease.