I was working with a senior resident in the OR a few weeks ago, and one thread of conversation lead to another, and he told me that he was thinking about broadening his life insurance coverage but he wasn’t sure how much coverage he might need. Hence this post.
Before I delve into the exciting topic that is life insurance, a couple of words about insurance in general. I’ve been writing a lot about insurance, a boring topic. I understand. However, because you don’t want to be dealing with money troubles when bad things happen to you, you should understand what different insurances do and have good insurance before you need it.
Also, for those of you who are not familiar with insurance in general and maybe are only familiar with health insurance (I certainly was when I was a resident), the general rule of insurance is to insure the big stuff and not worry about the small things. The point of insurance – at least to me – is to protect yourself against potential financial disasters and not to soften the little blows of everyday life. Don’t waste your money on frivolous insurances. If you collect on a policy and yet you could have afforded to pay the loss out of pocket, it’s a sign that you’re over insured. Just insure against big things that have the potential to hurt you and/or your family in a financially disastrous way. So what are some things that you consider your biggest assets? Probably rounding out the top three in most residents’ minds would be health, future income, and family. So think about insuring those things and not trivial things.
Ok. Now onto life insurance.
You generally need life insurance when other people (most likely your family) depend on your income. So if you’re single with no children, you probably don’t need life insurance unless you have some other people dependent on your income. Also, if you are a half of a working couple who could maintain an acceptable lifestyle if your spouse’s income were to disappear, your spouse probably does not need to purchase life insurance. Along the same logic, a wealthy person with a lot of liquid assets and little debt needs less life insurance, since liquid assets can substitute for insurance coverage.
So, how much life insurance do you need? Simply put, life insurance provides a lump sum payment to replace the income that you would’ve made. You need to ask how many years of income you want to cover for your dependents in case you die. If you google this topic, you will come across many life insurance needs estimators or calculators; websites for companies like Metlife and Prudential have it. You should use these tools, and I’m sure they spit out good estimates. However, there are other simpler ways to give you a good estimate. The following is one of them:
|Years of Income to Cover||Multiply Annual After-Tax Income By|
For example, if you want to replace 10 years of your income at the current level with life insurance for your family in case of your death, you multiply the latest annual after-tax income by 15. After-tax income, by the way, is gross income minus taxes (federal, state, and Social Security taxes). You can get this information from your last year’s tax return.
Alternatively, you can calculate how much the big financial things in your life are going to cost your family once you pass on – mortgage, college education for your children, etc. Let’s say that your spouse can work and make ends meet with his/her income, but you want him/her to be able to pay off the mortgage and send your kid to college. Then add up all the costs and buy life insurance for that amount. Of note, if you have a large student loan debt, you should find out if your debt is going to be cancelled upon your death. With some private student loans, the lender might come after your spouse for your student loan debts. Depending on what you find out, you might want to add your student loan debt into the calculation.
The next post will be on what type of life insurance to buy – term or cash value. I’ll also talk about some of the features of life insurance you should look at before you buy.