Life insurance is a crucial topic for new dentists to get right. After such an enormous investment of time, money, energy and effort in school, should the unthinkable happen you want your family and/or loved ones to be taken care of. (You? Peacefully in your sleep, of course. Me? Wingsuit skydiving, probably!) You want to be able to replace your income if you’re not around to provide.
I can hear the whole life insurance zealots now, “Whole life offers great returns!” and “It’s much safer than the stock market!”
I’ve heard it all before. Every time I sit and analyze a client’s whole life policy they’ve been paying on for a number of years, what they were told they would have in their account is never even close to what they actually have.
A few times a year I go to various dental schools and residency programs to talk with dentists about their upcoming careers. When I ask who some of the other speakers have been, insurance agents are always top of the list. It makes sense – as a newer dentist, you’re going to have a LOT of insurance policies. And life insurance should be among them.
In case you skipped all those lunch and learns at your school, the two types of life insurance you’ll need to decide between are term and whole life insurance. The differences in a nutshell are basic. Term insurance is a monthly bill you pay, hoping you never see any benefit from (because you’re not dead! That’s good!) Whole life insurance is also a monthly bill, but instead of you never seeing your money again if you don’t die, when you’re much older, the policy has a cash value that you can then borrow from, withdraw, pass on to heirs, etc.
With the knowledge that chances are good you’ve talked with at least one insurance agent, here are five reasons why you should stick to term life insurance as a new dentist:
- Cost. I ran a quote on myself for a $2.5-million-dollar term life policy. (For the record, I’m 35, a non-smoker, and frequently offered underwear modeling contracts that I graciously decline. Two out of three of those facts are true.) The cost was $1,760/year. I then ran a quote for a whole life policy worth $250,000 (10% of the amount my wife would get if I die, compared to the term policy.) The cost was $3,440/year. This is double the cost for 10% of the benefit with whole life. Term insurance is always much cheaper. The brutal fact is in order to be adequately covered, you’ll probably need a large amount of coverage. If you feel better with a whole life policy, the cost to get to that big number becomes so prohibitive, that most choose inadequate coverage and the family suffers as a result.
- Timing. Today, right now, you’re as young and likely as healthy as you’re ever going to be. That means, that your insurance policy is as cheap as it’s ever going to be too. Truthfully that applies equally to both types of insurance. However, when you’re older, term life insurance may not be an option. Or, it may be so expensive that you may not want to purchase it. I spoke with a dentist recently who, in his 50’s, had not been as successful in his career as he thought he’d be in his early 30’s. He had a whole life policy, but was concerned about large family obligations and debt load. He had recently lost a parent unexpectedly and, being reminded of his mortality, was surprised to learn insurance companies were quoting annual premiums 10- to 15-times higher than he thought he’d need to pay. He is still uninsured.
- Term is straightforward and easy to understand. One thing that drives financial advisors like me up the wall is when we see the assumptions in the presentation given to dentists about choosing a whole life policy. So often the assumptions are not realistic. As a new dentist, you don’t know any better. Why would you? Just like I don’t know that one dentist’s choice to choose a cheap composite on my filling was a poor choice, often times I see people making poor decisions about insurance based on assumptions that are very unrealistic. Term insurance is simple. Pay a small premium, and if you die, your heirs get a big check. That’s it. Simpler is better here. Trust me. If I could get back the hundreds of hours I’ve wasted trying to understand the inner workings of whole life, and reinvest it with my kids, I’d do it in a heartbeat.
- Insurance is not an investment. Insurance is a transference of risk. You transfer the risk over many people similar to you, which reduces everyone’s risk. When you try to overlay investments on top of that, it gets exponentially more expensive. Keep your insurance in its own lane, and keep investments in their own lane. Besides, as a new dentist, you’re probably more focused on increasing your earnings and paying down debt. Investing serious amounts of money probably won’t come for at least a few years into your career.
- You’re not making your insurance agent rich – Commissions on insurance policies can run anywhere from 55% to 100% of the first year’s premium. You saw how differently term and whole life policies get priced with my own example. Thus, human nature being what it is, your insurance agent has a strong incentive to sell you the more expensive policy. Not every insurance agent will push you towards an inferior option. In fact, we work closely with several insurance agents we know and trust. However, we’ve seen the results of enough poorly understood and poorly placed whole life policies, that we know bad actors are out there.
Practice Financial Group could be MUCH more profitable if we jumped on the whole life bandwagon. Many financial advisors and dental CPAs love whole life because of the income it provides their business. The numbers have not worked for our clients. We choose to recommend term life insurance as the best option for dentists – especially new ones. And we sleep so much better on our thinner wallets.
While it’s true whole life rarely gets recommended for our clients, there can be situations where it makes sense. Typically, whole life insurance has a place in the portfolios of high-earners who have maxed out their other investment opportunities and are looking for an ultra-conservative place to invest. If you’re looking for whole life insurance as a new dentist, and thinking that it will mean smooth sailing in your retirement years, you are probably wasting your money.