As a physician, you know that it’s important to protect yourself, you loved ones and your medical practice, but what type of insurance is right for you?
One popular option is permanent life insurance. Permanent life insurance provides lifelong coverage as long as you continue to pay your premiums. Permanent life insurance policies also build cash value over time. Throughout your lifetime, you can take tax-advantaged loans against the policy’s cash value, use a portion of the cash to pay policy premiums and even surrender the policy to help fund your retirement.
For physicians, there’s one more important benefit of permanent life insurance policies that should not be overlooked. The accumulated cash value is sheltered from creditors. This is a huge benefit for physicians who are at risk for malpractice law suits, as policy assets are protected from litigation.
Types of permanent life insurance policies
There are two main types of permanent life insurance policies: whole and universal. The chart below provides a side-by-side comparison to highlight the similarities and differences between these two policy types.
| Whole Life Insurance | Universal Life Insurance | |
|---|---|---|
| Cash value | Guaranteed accumulation of cash value throughout the life of the policy. | Potential to accumulate cash value varies over time, based on how you fund the policy and a variety of other factors. |
| Premiums | Premiums remain consistent throughout the life of the policy. | Premiums can be increased or decreased within certain limits, and typically increase over time as policy owner ages. |
| Death benefit | Guaranteed death benefit as long as premiums are paid. | Amount of death benefit can change. Policy may be revoked if not adequately funded. |
| Flexibility | Less flexibility to make changes to the policy’s term, but offers a guaranteed death benefit that will never decrease as long as premiums are paid. Premiums will not change over the life of the policy. | More flexible that whole life insurance. Owner can adjust the terms of the policy and amount of premiums. |
The benefit of allowing the cash value of a permanent life insurance policy to accumulate is that the assets are not subject to tax as they grow. Once you accumulate enough cash value in your policy, you can typically access assets in four different ways.
1.Surrender – The first option is to cancel your policy and receive the cash value. Keep in mind that this leaves you without life insurance protection. And, if it’s a newer policy, you may face significant surrender fees and or tax liabilities. If you need to access policy funds prior to retirement, it’s typically wiser to use one of the other strategies.
2.Withdraw from the cash value – Assets withdrawn from the cash value of a permanent life insurance policy are tax-exempt as long as the withdrawal is for less than the amount paid into the policy. However, your death benefit will be reduced following the withdrawal, and the reduction may be greater than the amount you take out, depending on the policy’s terms.
3.Take a loan – While each policy has it’s own loan provisions, most allow you to borrow up to 90% of the cash value for any reason. Borrowing from your life insurance policy does not impact your credit, and there’s no approval process. Also, the loan is exempt from taxes since the IRS does not recognize it as income.
It’s important to note, however, that cash value loans are expected to be paid back with interest, in addition to your regular premium payments. If the loan is unpaid, interest will begin accruing on the outstanding balance, which can eventually cause your policy to lapse.
Another downside to taking a loan is that it could potentially reduce the policy’s death benefit and/or nullify any policy guarantees. This means your loved ones could receive less if you pass away with an outstanding loan balance.
4.Use the cash value to pay for premiums – A common strategy among retirees is to use the cash value of a permanent life insurance policy to pay for policy premiums. This can help you maintain coverage after you retire if you experience a drop in your monthly income once you’re no longer working.
When should physicians consider permanent life insurance?
Permanent life insurance often makes sense for physicians who wish to maintain coverage for their entire lives, while also accumulating cash value over time. Because this cash value is protected from creditors, permanent life insurance also makes sense for physicians at high risk for malpractice lawsuits.
Could you use some help determining if a permanent life insurance policy makes sense for your particular situation? Scureman and Associates is here for you. We specialize in helping physicians identify, implement and maintain life insurance policies that meet their specific needs and help protect their future. For a complimentary life insurance assessment, please schedule a call.
