Maybe You Don't Need Life Insurance?

August 17, 2015

Life insurance is very rarely a good investment. The vast majority of physicians and staff should only buy enough to replace potentially lost income.

Amid the plethora of articles on why you need life insurance, none suggest reasons you may not need it.

There are two major reasons to have life insurance.  The most common is to replace the lost income of someone dying early.  The classic example would be a young man or woman who is the main income producer of a family.  The amount of insurance should be enough to provide a stream of income that would match what was needed in the future by the family.  Typically, as a family builds assets up and heads into retirement, they may no longer need the income replacement. 

The second reason to have life insurance has to do with estate planning.  The classic example is the family with a large illiquid business, which has significant estate tax liability when the founder/owner dies.  Life insurance can be used to pay the estate taxes and keep the business whole.  Similarly, life insurance can help with buyouts in business organizations and help with the risk of losing key individuals.

I encounter many families entering their retirement years who continue to pay for life insurance coverage. Usually, assuming they have substantial assets and no dependents other than a spouse, they can drop the increasingly expensive coverage.

Many policies are sold (with large commissions) to physicians and others as "investments."  To be honest, insurance is only very rarely a good investment, unless you die early.  The vast majority of physicians and their staff should follow the path:  Buy enough level-term insurance to replace a potentially lost income, accumulate assets, and then drop the insurance when you have "enough" saved.

Most single individuals without dependents do not need life insurance.  The only argument here is to provide for coverage in the case that illness or injury makes coverage more difficult or expensive to obtain later.  Although this is a reasonable thing to consider, it is usually not a good bet.

 Children almost never need life insurance.  I have seen many policies "sold" to parents with the explanation that it will be a good college savings plan, etc.  It is not. 

Unfortunately, the life insurance business is tilted towards large financial rewards for the sale of various whole-life products.  This leads to a great deal of abuse and ill behavior towards clients.  I would personally counsel anyone considering whole life insurance to discuss the purchase with a fiduciary advisor first.