Dr. Stephanie Pearson, CEO and co-founder of PearsonRavitz, joined Dr. Brent Lacey, a business and personal finance counselor, on his podcast the Scope of Practice. They covered the ins and outs of life insurance, and how to get the best coverage for you and your family.
We’ve captured the highlights of the conversation just for you:
What is life insurance actually for?
At its purest definition, life insurance is a financial benefit that your beneficiaries would receive upon your death. So if you die, somebody of your choice gets money. That’s the cleanest definition.
If no one depends on your income, why would anybody waste their money on life insurance?
I actually have a different conversation when talking to single men compared to single women who have not started childbearing yet.
I would agree that for a single man with no dependents, you’re wasting the money.
For women, on the other hand, I recommend they get something in place before pregnancy. The reason is that gestational diabetes, which is rampant in American society, will increase the cost two to four times. Some carriers will not readdress someone’s health class until they’ve been five to 10 years removed from the diagnosis.
How can you calculate how much life insurance somebody needs to buy?
Life insurance comes in a couple of flavors: term life and permanent life.
Permanent life insurance is an umbrella term, we’re looking at whole, universal, variable, etc. I do think there is a time and a place for that, but most of my clients are early in their careers and raising a family, in which case I focus on term life insurance.
When talking about term life insurance and how much somebody needs, I tend to look at ranges. So, 10 times your income or 20 times your income if you live in a high cost of living area, or a million dollars per child. Then, roll in things that won’t die with you. That would mean things like mortgages, small business loans, etc. Banks don’t care where that money is coming from, but they do want that money back.
If we’re looking at investing the principal, how much interest will we have to put toward all those things each year? Keeping in mind that the principal will come tax-free and that the interest is taxable, you have to consider if you’re conservatively investing the money. I would want to conservatively invest if my kids were young and had many years left at home. Conservatively, you’re looking at about a 4 percent to 5 percent return on interest per million invested. In that case, you’re looking at somewhere between $35,000 and $45,000 of usable interest. And that’s really the number I tend to hone in on.
Now, there are many factors that go into how much any individual needs or how much a couple wants. There could be differences in geographical positioning, if the insured is the primary or secondary breadwinner, etc.
I don’t like to pigeonhole into a firmly set opinion of, “This is how much any individual would need,” and that’s why I tend to talk in ranges.
Does a non-working spouse need life insurance? If both spouses are working, do they both need life insurance?
The answer to both of those questions is a resounding yes. I think that historically, we look at stay-at-home spouses as potentially not needing to be covered. When the fact of the matter is, what they’re doing in the household has real financial value. If the stay-at-home spouse should exit, all of a sudden, you open up new childcare costs, new home care costs, and realize that the stay-at-home spouse tends to keep the ship running. That is why I absolutely recommend that a stay-at-home spouse has life insurance in place.
As far as working individuals, it’s essentially the same idea. Now, do they both need to be “maximally insured”? Maybe they don’t. But they both need to have coverage because they’re currently using two incomes to run their household the way they’ve been running it. So no matter what, if one of them goes away, it’s going to be a hardship.
I also point out to folks that the remaining spouse is going to need to grieve. Sometimes, people don’t give thought to whether they could continue working in the same way they have should their spouse expire while their kids are young. The answer for a lot of people, financially, is no.
They’d want to pull back a little bit and be home with their children more. They’d want to take time off to grieve and figure out what’s next. That has to come into play when people are thinking about those what-ifs.
What’s the difference between permanent and term life insurance products?
I admittedly bought a permanent life insurance policy when I was in my late 20s. Remember I said I learned a lot the hard way? Yeah, I no longer have that.
Very simply, term life insurance is good for a period of time. You can get a lot, and it is much less expensive. However, there is no building of cash value. And, if and when you outlive your policy, it’s essentially use-it-or-lose-it for lack of a better term. You’re paying rent on your life.
Whereas permanent products last your lifetime. They will build cash value over time that you can borrow against. However, they are exorbitantly more expensive. Often to the tune of five to 10 times more costly than term life.
When kids are out of the house and financial situations are different, then potentially you can start talking about permanent life insurance.
One of the reasons you may be talking about it lasting your lifetime could be if there is an underlying strong family history for something that may make it hard for you to get insured later, or if you have a high net worth.
What are some strategies that you recommend to your clients for helping lower their life insurance premiums?
There are a couple of things we can do preemptively. We can at least address the first elephant in all the rooms: BMI. You want to be the healthiest you can be. So when you’re thinking about getting insurance, it’s not the time to pick up new bad habits.
For women, again, it’s important to do it before they get pregnant so that things like gestational diabetes aren’t a factor.
Another way that folks can really lower some of the overall premiums is in laddering or layering policies. I’ve talked before about the 10-, 20-, or 30-year product design that you can mix and match. In some cases we do this because any time you increase a policy by 10 years, you increase the cost anywhere from 60 to 85 percent depending on health class and product design. So the goal is to get the most coverage that makes sense, both in time and money.
If you could give one piece of advice to the physician out there who doesn’t know where to start, what would that be?
You will never be younger, and you’re probably also never going to be healthier. Now is the time to at least start looking into it. Using platforms like the “Scope of Practice” where Brent has a good listing of folks he has vetted, that’s a good place to start.
It’s just a matter of saying, “This is a priority, and I’m going to make a couple of phone calls.” It doesn’t have to be overwhelming, but make it a priority to get it on the calendar. Spend just a little bit of time talking to a couple of different brokers and see what feels right.
If you need help sorting through any of these things or have questions about what we covered, I am incredibly accessible: My email is firstname.lastname@example.org, our website is www.pearsonravitz.com, and my office number is 610-658-3251. I also have a LinkedIn profile. If you reach out, you can expect to hear from me within 24 to 72 hours. Please don’t hesitate to get in touch. I’m here to help.
To listen to this whole podcast interview, visit:
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