There are two things that are certain in life, death and taxes so plan accordingly.
Physicians buy life insurance for many reasons, to replace income, to provide for their dependents, to pay off tax liabilities, as a tax preferred asset class or as a retirement and estate planning tool.
What are the different types of life insurance?
There are two types of life insurance; term and permanent. Term insurance is temporary in nature and has no cash value. This is sometimes referred to as rented insurance. Rates increase every ten or twenty years (the “term”), eventually becoming prohibitively expensive and policies expire with no cash value.
Permanent insurance is lifetime coverage and can provide for a long-term need, estate and tax issues, legacy issues and can be used as an asset class. There are two types of permanent insurance; universal life and whole life.
- Universal life insurance offers lifetime coverage and long-term protection. Similar to a mortgage on your home, you can pay the policy off over a period of time or you can pay the premium for life. Traditionally this type of policy is for a pure insurance need.
- A participating whole life insurance policy can be an asset accumulation, estate, and retirement planning vehicle. It is designed to enhance the cash value in a long-term dividend interest rate earning asset class while providing guaranteed cash value and permanent life insurance. Often clients will use a participating whole life policy as an asset class due to the preferred tax treatment.
How much life insurance should you have?
Life insurance is the cornerstone of a well thought out estate plan. Most physicians want to provide enough capital to pay off any and all debts/mortgages, provide for the children’s education as well as a guaranteed annual income to their spouse plus emergency funds.
Do the math
First, examine what you spend per month and what you need to provide your spouse/family until he/she is ready to retire. There are a few things we need to know …
- How long do you need to provide funds to replace your missing income?
Let’s assume you are the primary income earner and your spouse/family needs an income replacement for 20 years.
- How much income do you need to replace?
In most cases, your family will need 75% of your income to live on. If you are living on $325,000 per year, you will need to provide $245,000 (75% of $325,000) in today’s dollars assuming the mortgage is paid off.
- What is a realistic return on investment?
We assume your investments are earning 6.5% before fees or 5% after fees. You then need to adjust for inflation (2%). Therefore, a 6.5% rate of return, translates into a 3% real rate of return.
In order to provide an income of $245,000/year in real dollars (inflation protected) for 20 years earning a rate of return of 3%, you need an asset base of $3,645,000.
Each $1,000,000 of insurance will provide $47,000 per year of income for 20 years.
After 20 years there is no money left.
Having the right protection in place is a crucial step in building and maintaining a strong financial foundation.
When someone passes away people celebrate their life. Some people bring flowers, some bring sweets, we arrive with a cheque. Our job isn’t sexy, but we make sure that the cheque is big enough to take care of your family. There have been times when we have delivered cheques and spouses say, “that’s it?” and other times they have said “wow that will really help us.”
The question is how you want to be remembered.
Elliott Levine is the President of Levine Financial Group in Toronto
416-222-1311 I firstname.lastname@example.org