Life Insurance for Physicians: Key Buying Questions

The last two weeks of the year is high selling season for life insurance polices as doctors rush to fund various retirement plans and as advisers take advantage of year-end wealth-transfer opportunities and favorable deals sometimes available from insurance companies. Knowing the right questions to ask about an insurance policy is a key issue for physicians, especially considering the significant investment often involved and the exit costs involved in buying a lemon.

Covering all the options and nuances available in the life insurance marketplace in anything less than book form is nearly impossible. The following are core concepts to be aware of that are the most basic and generally applicable.

What is my annual premium and can it change? This is the amount the insurance will cost you every year. In some case this number is fixed and in other cases it can change based on variety of factors such as the performance of the stock market and other indices. Make sure you understand your obligations and what you will lose or be left with if you don't make what the policy expected and what was actually illustrated.

Show me the policy illustration. I see lots of bold promises and spit-ball estimations of future performance made by advisers. The policy illustration is all that matters, so any conversation about what could happen if the policy exceeds the expectation that the illustration creates is moot; don't engage in it and instead ask about the "minimum guarantees" if one exists at all. That's the minimum you'll earn in the policy if the worst happens. Remember, the column on the far right in most illustrations is the "perfect world" scenario, so look at and have the others explained as well.

Does this policy have a cash value? The cash value is the amount of premium that builds up inside the policy and that may be available to the policy owner in the future. Some policies, like term insurance, have no cash value, while others have it immediately and some build it up over time. Be clear if yours does and exactly when it will be available if you need it and under what terms.

Is my policy protected from creditors? We've covered the tactical use of high-cash-value insurance with this feature before. Know what the laws in your state of residence are and if your policy and both the cash value and "death benefit" (dollar amount paid upon your death) is protected by law or not. Asset protection of liquid assets is always a key focus of my concern. If the law is not in your favor, some simple trust planning can often protect your policy from both estate taxes and more active threats.

How long will my policies last? Again, this goes back to the illustration and specifies how long the coverage will be in place at a specific cost and what the death benefit will be through the term of the illustration. In some cases, keeping the policy alive may have significant increased costs while in others you may be able to reduce the death benefit to keep the premiums level or to stretch the policy for a longer period of years. Find out how flexible your policy will be in the future and weigh that as part of your risk-and-liquidity analysis.

What's my exit strategy? Find out what happens if you can't or don't want to continue to make premium payments. With term insurance you usually lose what you paid; that's OK, think of it the way you might car insurance. Other policies that were structured to have a future cash value or that have a current cash value early on however may have significant "surrender penalties." Know what happens if you walk away and what options the policy may provide, including the specific surrender penalties that may be imposed in the policy. The carrier could, for instance, keep all the cash value you built up if you don't keep it for a minimum number of years.

This list just scratches the surface and is deceptively simple. Our goal here was to introduce some of the key concepts and questions you must be familiar with, so you can do your own due diligence on when buying life insurance, whether a simple term policy or a complex premium-financed strategy with a triple-reverse galactic split dollar that includes a trip to the Bahamas to read the policy. My thanks to Jeff Christenson, president of Christenson Wealth Management in Phoenix, Ariz., for his significant contribution to my education on these issues.