Money Meets Medicine Podcast

MMM 83: Whole Life Insurance for Physicians

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Odds are you have been pitched Whole Life Insurance and have no idea if it’s a good idea or a bad idea. Since it is so common for a physician to get this pitch, we thought it would be good topic to discuss on the podcast so we could help you through what Whole Life Insurance even is, where the conflicts of interest are, the different life insurance options, and what to do if you have already purchased it and want out. 

We know they don’t teach this stuff in medical school, so stay tuned to find out exactly what the deal with Whole Life Insurance really is. 

What is Whole Life Insurance? 

Whole life insurance is a death benefit plus a savings mechanism. There are many different names for it, but they are all the same.  You may hear it called Universal Life Insurance, Permanent Life Insurance, or Cash Value Life Insurance.  Forbes offered a breakdown of all of the life insurances that the average American has purchased in the country and whole, universal, and variable life make up 80% of the insurance owned!  This insurance is sold all of the time! 

With a whole life policy, key in on the savings mechanism.  The break-even point on the savings mechanism is 10-12 years. This saving mechanism builds cash value in the policy that can be borrowed against (at interest).  If you take cash out, it reduces the death benefit if you were to die.  

The thing to note here is that insurance is insurance and investment is investment.  You don’t mix the two!  Whole life is pitched as an investment in your future, but this is a product to be sold, not bought.  That is because the amount of money required each month is an insane amount of money and is normally between five to six thousand dollars!  What if you were to invest that amount instead of waiting 10-12 years to break even? With a whole life policy, you put in $100,000, you get out $100,000.  If you were to invest instead in a taxable account, you could start with $100,000 and end with $200,000 or $300,000…or more! 

Don’t feel bad if you are already involved in whole life policy, just realize that you need to make a change now, not later.  Keep reading and we’ll talk about taking steps to put yourself in a better position, and what your other options are. 

Conflicts of Interest with a Whole Life Policy 

With a whole life policy there are immediate conflicts of interest with the agent selling the policy. The insurance agents are paid 50-110% of the first annual premium, then less the next year, and continue to receive trails after that.  Let’s say that the monthly premium is $4000 a month, which would be about $50,000 per year.  The agent gets 50-110% of that premium.  That can be $40,000-60,000 just for selling you that policy! After that, they receive a 5-7% of trail every year that you pay that premium until you die.  They earn 5-7% of the premium on an annual basis just for servicing that account! 

Insurance companies are archaic and still run on a DOS program, but they are all on an agency system.  Insurance agents are the middlemen between the company and the customer.  When they are selling insurance, they are going to focus on selling you the policy that they will keep making money off of long after the original sale. If they get five to ten people to sign up for a whole life policy, they are now making doctor money!  When you go to get a life insurance policy, go to somebody independent that you trust!  

About the Agents Selling Whole Life Insurance 

When Ryan was done with schooling, he was set up with insurance companies to interview.  When he was interviewed, none of it was about what he knew or what he learned at school.  All of it was about selling.  The main question they all asked was “Who do you know in your circle who would actually buy from you?” When he responded with “Hopefully no one,” the interview quickly ended.  The education system pushes graduates into big firms because they think it is a stable job, but until you work it, you don’t fully understand it.  Because of this it’s important to remember that just because an agent is selling whole life insurance does not mean they are bad people.  They don’t know better and don’t realize that all they are doing is selling products and aren’t actually giving true financial planning advice.   

Term Life Insurance 

There are other, better options out there than whole life. Term insurance is a great option. This policy offers coverage for a certain period of time, normally 10, 15, and 20 years.  You may find options for 40 years, but don’t do this!  How a term life insurance policy works is if you die within the chosen time frame, your beneficiaries get exactly what the policy states.  It is a flat amount, it doesn’t scale, and has no cash value.  You get life insurance to protect your earning potential for those who rely on you.  This is your most vulnerable time because you still have 10, 20, or more years of earning potential.  If you get a contract to practice for 20 years, without any pay increases, it is a $6 billion contract!  You are vulnerable, and before you sign anything have it reviewed!  Everything should be in writing, and you should understand what you are signing before you sign it.  

Keep in mind that the need for life insurance is temporary! You do not need it forever.  Your earning potential and net worth increase and the amount of coverage you need should decrease to nothing as your net worth increases.  Once you are financially independent, you no longer need life insurance.  Instead of getting a whole life insurance with the savings built in, get a term life policy and invest the difference!   

Already Have Whole Life Insurance? 

If you already have whole life insurance and are now concerned about what you can do, it all depends on how long you have been in it.  If you have had it four to five years, it is probably best to eat the loss and move on.  If your parents purchased it years ago, the premium is fairly low, and you have had it for 20-30 years, you should keep it.  Most times the best option is to run through the math.   

This is where the sunk cost fallacy comes in.  What that means is the money is already spent and you can’t get it back.  Let’s say you bought tickets to a concert and it’s your favorite band, and then the worst blizzard hits and you still want to go.  You are thinking of braving the storm even though the money is already gone.  If you go or don’t go, you have already taken the money out of your account and it is a sunk cost.  This is the same as a whole life policy that you don’t want to keep paying into.  If you cancel it and stop paying into it, the money is already spent, but you can use the money you were putting into it for investments, savings, or paying off debt.   

Before you take the leap and cancel your old policy, have a new policy set up already.  If you happen to get denied for a term life policy and had already cancelled your whole life, you have nothing.  A whole life policy is better than no life insurance at all.   

How to Get Rid of Whole Life Insurance 

You have already lined up new insurance and are ready to cancel your whole life policy.  There are a few different options, but before you make any decisions make sure that the advice is coming from somebody who doesn’t sell you products and has a conflict of interest.  Go to an independent agent who will complete a detailed analysis.  This will take a couple of hours, and that agent should come back to you with options.  Confirm they are a fee only agent without kickbacks or referral fees.  Get everything in writing, read it, and continue to ask questions until you fully understand.  Don’t just do the doctor thing and sign at the bottom! 

Now that you found a good agent for your new policy, it is time to weigh your options on what to do with your whole life policy.  A couple of options are cash value surrender or convert to term.  The first option is the cash value surrender. In this, you only get part of it back and the rest is a sunk cost.  Some agents will recommend for you to stop paying and let the cash value pay for it until it is out but then you might not be able to take anything out.  The next option is to change your policy to a cheaper policy. You will need a trusted insurance agent to help you with this process.  There is even the possibility of unwinding some of the payments if the policy was issued to you without actually fitting your needs at all.

Whole Life Insurance is Not the Best Option 

Whole life insurance is constantly sold to physicians and because they don’t have the information required to make a good decision, they are constantly convinced by the insurance agents that whole life is the best option.  Remember that life insurance and investments do not mix!  A term life insurance policy and a separate savings or investment plan is the best option.   

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  1. Noah

    Quick question. I am currently maxing out my 401(k) including an additional $40,000 nonqualified contributions. I max out My HSA and have the majority in the market, I max out a Roth IRA for myself and my wife yearly, and I put approximately 25k to 30,000 into a brokerage account yearly. I do have a whole life policy in which I put $1300 a month for $1 million of coverage. I thought being that I will have this money to utilize the retirement for periods where the market is down and not needing to tap into my market reserves when the market is at lows. I am only about 1.5 years into the plan, and just wondering your thoughts?

    • Jimmy Turner, MD

      I mean there are worse things you could do with your money (like put it into a steel drum and burn it), but the question still stands… would you be better off just buying term + putting the extra $1,300 per month into your brokerage account?


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