6 Reasons I’m Not Buying Whole Life Insurance (and you shouldn’t either)

If you’re a physician or high-income earner, you’ve probably been approached to purchase whole life insurance. While many of your fiscally responsible colleagues may warn you not to buy it, many other financial advisors seem convinced that whole life insurance is a must-have. With such conflicting advice, you may be confused on who to listen to and unsure about what to do. Several of my physician friends are in the same boat. In fact, many of them have asked me to help them understand why “whole” life insurance is so bad and “term” life insurance is ideal. Here was my response:  

Most whole life insurance policies, universal life insurance policies, indexed life insurance policies, (and basically anything other than term life insurance) is sold to us under false pretenses. These policies are branded as a way to “guarantee” our family money when we die. However, if you delve into the fine print of these polices you will see that they aren’t nearly as good as they sound. In fact, there are 6 main problems with whole life insurance:   

1.     You don’t need it. Unlike disability insurance, where we insure against the unpredictable risk of becoming disabled, life insurance is different. We already know that we will “pass away” at some point. Thus, dying isn’t necessarily a “risky” event, it is an EXPECTED event. Any event that you can expect to happen, you can plan for yourself. Since you can plan for this event yourself, you only need to insure against the risk that you could die before this plan is fully carried out. In other words, you don’t need life insurance for your “whole” life. You only it for a certain period of time or “term.”

2.     It’s inefficient. In order for whole life insurance companies to guarantee your family money after you die, they must have money to give them. Insurance companies aren’t charities, so they definitely are not giving your family money out of their own pocket. What they do is collect a large amount of YOUR money to pay into THEIR system. In fact, the financial advisors who sell you whole life insurance put a large portion of your money into their own pockets as profits, then take the rest and “invest it” into low-yield accounts. If you die young, your family may not get much of anything at all because you’ve haven’t paid into the system for long. If you die old, your family won’t get nearly as much as they should because the insurance company still needs to make a profit. With whole life insurance, you end up paying a huge chunk of money to an insurance company that will give you and your family much less in return.

3.     It’s expensive. Whole life insurance policies pay out to your dependents after you pass away. Thus, insurance companies will want you to pay for the cost of that benefit upfront. Paying for this benefit is insanely expensive. In fact, whole life insurance costs about 10x more than term life insurance. This means you could easily be paying hundreds if not thousands of dollars each month for this policy. That’s a lot of money to spend on an inefficient insurance product you don’t need.

4.     There are lots of hidden fees. The vast majority of whole life insurance products have a slew of hidden fees. These expenses take away from the value of the product and drastically decrease the benefit your dependents receive when you die. In fact, most of the money you pay the insurance company for a whole life insurance policy is paid directly to the agent who sold you the policy as “commission.” I can think of many more ways you can spend your money, than to pay tens of thousands of dollars in commission fees to an insurance agent.  

5.     The benefit isn’t as good as you think. If you look at the fine print of these whole life insurance policies, you’ll see that the benefit it provides to your family isn’t very good. In fact, the “returns” are actually negative in the first few years. This means that if you die shortly after you purchase a whole life insurance policy, your family may not get anything at all, even though you’ve paid thousands of dollars in premiums. If you die much later in life, the average returns on your money are only 2-4%. In contrast, average returns from the stock market are 7-10%. This means that if you had simply placed your money into an index mutual fund, you’d have been able to give you family drastically more money and paid much less in fees.

6.     There’s a better alternative. The biggest reason I’m against whole life insurance is that there is a much better way to proceed. You can save money for your loved ones without ever having to purchase whole life insurance. How? By maxing out your retirement accounts so that you can save and invest money in a tax-efficient way. By converting money each year to Roth accounts (like a Roth IRA) so that your family can inherit the money you save tax-free. By purchasing a “TERM” life insurance policy so that if you happen to die before you’ve been able to pay off your student loans and stack enough money for your family, the insurance company will provide a hefty benefit to your family.

My point? As busy young professionals, we already sacrifice a lot. The last thing we need to do is to get tricked into purchasing an insanely expensive insurance product that has lots of hidden fees. There is a much better alternative. Save money for your family yourself and purchase a “term” life insurance policy to cover yourself in the meantime. Don’t buy whole life insurance.

Types of Insurance We All Need (in addition to health insurance)

Many of us are young and healthy with our entire lives ahead of us. As we continue to progress in life, we need to make sure we are doing so with the right protection. In other words, we need insurance. I don’t just mean medical coverage and car insurance though. Let me explain.

1.     Almost everyone needs long-term disability insurance. Unless you have a huge trust fund, enough passive income to completely cover your monthly expenses, or enough retirement savings to deem yourself financially independent, you need disability insurance. Why? Because if some unfortunate event were to occur that prevented you from working, you’d still need a way to support yourself. Disability insurance guarantees you a certain monthly income if you were to get fully or partly disabled, suffer from some medical illness, or get into an accident that prevented you from working your job. Since you can’t predict whether you’ll be disabled in the future, you need to insure against that risk right now. The younger, healthier, and earlier in your career you are, the more important it is to have disability insurance.

Although long-term disability insurance may be provided through your employer, group policies from your employer may not offer sufficient coverage. The payout from your employer is usually capped at a certain amount and may not fully replace your income. Plus, group policies may be less likely to pay out if you do become disabled because their definition of disability may be too broad. In other words, it may be harder to meet their definition of “disabled” and thus you may be less likely to receive the benefit when you need it. My point? Most high-income young professionals should purchase an individual, long-term disability insurance policy outside of their employer.

2.     You may also need life insurance. Life insurance guarantees a portion of your salary to your spouse or dependents should you pass away sooner than expected. This is critical if someone else depends on the money you make. I will be honest and say that as a single female with no kids, I don’t have an individual life insurance policy. However, if I get married to someone who is dependent on my income or have kids, it will be one of the first things I purchase.

There are two types of life insurance: whole life insurance and term life insurance. Term life insurance provides a benefit to your family if you die during the term of the policy (usually 30 years). Whole life insurance provides a benefit to your dependents regardless of when you die. Whole life insurance may sound more appealing, but you may want to think twice before purchasing it. Unlike term life insurance, whole life insurance is insanely expensive (about 10x more than term insurance), has a lot of hidden fees, and is unnecessary for many high-income earners who can provide money to their families in a more efficient manner.

My point? Most people need term life insurance to make sure their families don’t struggle financially if they were to die sooner than expected (within the next 20-30 years). If you were to die after that time, then you should hopefully have enough money saved (via retirement accounts and other high-yield investments) to take care of your family.

3.     Some professionals need malpractice/liability insurance. Most physicians are familiar with this type of insurance and most non-physicians don’t have to worry about it, but even still, I think it deserves a quick blurb. Malpractice insurance protects you in case you make a mistake at work that severely impacts someone else’s quality of life. You want to ensure that the patients or clients you work with can’t sue you and take everything you own. The ideal amount of liability insurance depends on your career specialty and other risk factors that put you at increased or decreased risk of being sued.

There are two main types of malpractice policies you can purchase: a “claims” policy and an “occurrence” policy. Claims policies cover you if someone files a claim against you during a certain period of time or while you work for a certain organization. The downside is that if someone waits to file a claim against you when you no longer work for that company, then a claims policy will not cover you. On the other hand, an occurrence policy covers you for any event that “occurred” during the time frame you were at the organization or under the policy. With an occurrence policy, if someone waits years to sue you then you are still covered because the action in the suit “occurred” during the time you were covered under the policy. As you can imagine, occurrence policies are more expensive but offer much better coverage. If you are working a job that only offers a claims policy, then you need to make sure you have what’s called a “tail” (added protection that will cover you in case someone sues you after you’ve changed jobs).

My point? Consider getting malpractice or liability insurance. The best kind is an occurrence policy, however, that is also the most expensive. If your job already covers the cost of a “claims” liability insurance policy, be sure to purchase “tail” coverage so that you have liability insurance after you change jobs.

4.     Consider adding an umbrella insurance policy to supplement your car and home insurance . While liability insurance covers you if someone sues you for something you did at work, umbrella insurance covers you in case you’re sued for something you did outside of work (i.e. civil disputes, business deals, etc.). For example, umbrella insurance can pay for your legal fees if your dog bites someone in the neighborhood, you accidentally injure someone at a social function, or some toddler gets injured at your child’s birthday party. It also acts as additional automobile and homeowner’s insurance. Although umbrella insurance doesn’t cover your own injuries or damages to your own property, it does protect you and cover your legal fees from harm you may cause to someone else.

Since umbrella insurance is added insurance, you can only purchase it after you have already purchased a certain amount of automobile or homeowner’s insurance. As a rule of thumb, umbrella insurance is purchased in benefit increments of a million dollars and it is usually best to purchase enough to fully cover your net worth (including the value of all your assets and potential future income). A policy with a benefit coverage of $1 million usually costs $100-$300 a year.  

To summarize, get insurance and enough of it. In addition to medical coverage, car insurance and homeowner’s insurance, most high-income professionals need disability insurance if they themselves are dependent on the income they receive from their jobs. They also need term life insurance if someone else, like a spouse or kids, is dependent on their income. Malpractice/liability insurance is useful in case someone tries to sue you for something you did at work and an umbrella insurance policy protects your net worth from unforeseen lawsuits outside of work. As [future] high-income young professionals, it is imperative that you get the insurance you need to protect yourself and your net worth.