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LIFE Insurance

Question 3: How much life insurance should I buy?

The purpose of life insurance is to financially protect your dependents in the event of your death; accordingly, your dependents’ anticipated financial needs should be used as a benchmark when calculating how much life insurance you should buy. Most physician life insurance policies will be measured in millions.

Calculating Life Insurance Needs

The crudest commonly-used estimate for life insurance coverage needs is 10 times your annual salary. This type of estimate fails to account for a number of personal factors and could over- or underestimate your insurance needs.

A more specific estimate can be made by adding up existing debts, monthly expenses, and anticipated one-time expenses such as college tuition or funeral costs, then subtracting your assets that can be applied to these costs and any income that will remain after your death (e.g., spousal income). 

There are many life insurance need calculators available for free online (e.g., the Life Happens Insurance Need Calculator). These calculators can be helpful when estimating your own life insurance needs. Finally, as with all insurance decisions, each of these estimates may need to be adjusted for personal risk tolerance.

Policy Layering

One of the nice things about life insurance policies is that you aren’t limited to just one policy. A common reason that you might want more than one policy is that you anticipate the amount of coverage you will need will decrease over time. This scenario assumes that you will be building up your wealth as you work over the years. As your personal wealth builds, your need for insurance declines, since the personal wealth you’ve accumulated can be used to provide for your family. In addition, the amount of time for which you will need your death benefit to cover dependents’ expenses (i.e., the time to their financial independence, retirement, or death) will be decreasing over that same interval. To account for these changes in needs, one option is to buy multiple life insurance policies with different term lengths. See Figure 1A below (Example 1) for a graphical depiction of this concept.

Before buying two different life insurance policies with different terms, however, be sure to compare the price of their combined premiums to the price of a single large policy with the longer term. For example, in the case of Example 1, the combined premiums of Policy 1 and Policy 2 should be compared to the premium of $2 million 30-year term policy. If the prices are similar, you may end up choosing to go with the extra coverage provided by the larger single policy. Only consider splitting policies that you can otherwise afford if it is going to save you money.

Figure 1A. Policy Layering Example 1

A modification of this approach can also be used to make life insurance more affordable during residency. For example, if a general surgery resident calculates that he or she would need $2 million in insurance to cover future expenses for his or her spouse and children but the premiums for that policy would be very difficult to afford, he or she could purchase a cheaper $1 million policy to ensure some immediate coverage with plans to purchase an additional $1 million in coverage upon graduation from residency.

Taking this example further, if the general surgery resident believes that they will have built up enough wealth after 20 years working as an attending that they estimate the needs of their spouse and children at that time would be only $1 million, they could save money on the second policy by selecting a shorter term (i.e., 20 years as opposed to 30 years). This is depicted graphically as Example 2 in Figure 1B below.

Figure 1B. Policy Layering Example 2

While ideally all financial needs would be insured at all times, this approach can enable residents with tighter budgets who might not otherwise be able to afford life insurance to get on the board with some coverage while awaiting their attending salaries.


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