Secure Tomorrow, Don't Lose Today

September 16, 2008
Jonathan Krasney, CFP

Physician's Money Digest, April15 2003, Volume 10, Issue 7

Life insurance is a necessity,but paying high premiumsfor "ordinary life" is not.Insurance serves different purposesat different times in your life.

VARYING TIMES AND NEEDS

Early in your career as a physician,your family might purchasecoverage to protect against the lossof income from the breadwinner inthe case of an untimely death.When a spouse and parent of 2 issuddenly lost to disease or accident,the family needs enoughinsurance benefits to create thefund to provide for day-to-day living,college tuition, weddings, etc.After children are grown and thefamily has acquired financial assetslater in life, that same death benefitcan provide for payment ofestate tax due at the second death.

Whether it's for the head of afamily unable to properly supporttheir dependents, or the head of acorporation felled by a similar fate,in both unfortunate cases, a deathbenefit can serve to protect boththe company and the family fromunexpected financial devastation.

WHOLE vs TERM INSURANCE

You'll need to discuss purchasinginsurance with an insuranceagent. Unfortunately, these salespeopletend to convince you thatyou need so much coverage thatpaying the premium hurts. Anobjective of some insurance peoplecan be to get the insured to buyordinary whole life insurance, sincewhole life premiums—and commissions—are substantially more costlythan term insurance premiums.

While this type of coverage canbe effectively used in some cases,most of the time, it primarily resultsin increasing the selling agent'scommission, providing nothingmeaningful in the way of benefit forthe insured if the death benefit isthe primary objective of the policy.Usually, the insured wants to buythe most cost-effective death benefitin a permanent type of coverage.

Term insurance will inexpensivelyprovide death benefit protection for aperiod of time, while whole life willprotect against an eventuality. Whileterm insurance is very cost-effectiveearly in the policy's life, it becomesprohibitively expensive later on,when it's more likely to be called onto provide its benefit. The differenceis that the premium for whole life ispresently higher, but is permanent,whereas term premiums continue torise with advancing age.

BLENDED-POLICY SOLUTION

Some combination of ordinarywhole life and term insurance canprovide cost-effective death benefitprotection that has a smaller savingscomponent (ie, cash value) and agreater death benefit. If a breadwinnerwants to protect their familyduring its early years, they can use a20-year, level term insurance policy.That insurance is affordable, becauseit's priced according to the insured'saverage age during the 20-year periodand will be for death benefit protectiononly. Unlike whole or ordinarylife insurance, it will not includea savings component.

At the end of the 20-year period,the policy will either terminate or beconverted into some other variety ofinsurance, the premium of which iscalculated at the insured's new"attained age."Term is usually convertibleinto whole life at attainedage, which means that at the time ofthe conversion, the premium ispriced as though you were buyingthe insurance for the first time.

A sound basic strategy is to buya permanent policy (ie, one that willbe in force permanently) by using acombination of vanishing term andwhole life. The idea is for the termpolicy to be replaced by "paid-upadditions" purchased with the dividendsgenerated on the whole lifeportion. These blends of whole lifeand term insurance are a popularway of decreasing the current costof coverage, while not going to theextreme of buying only term. Paid-upadditions, once bought in a policy,are always in the policy for payoutat death. If you replace anamount of term with an equalamount of paid-up additions, thesame death benefit still exists.

Jonathan Krasney is a financialplanner and the president ofKrasney Financial, LLC, inBrookside, NJ. He is an expertin personal finance issues forhigh-net-worth individuals andoften assists clients in estate planning issues,tax management, bonds, mutual funds, andcharitable giving. He has appeared on CNN,CNNfn, and can be seen regularly onCNBC's Power Lunch "Making Your MoneyWork" segment. Mr. Krasney welcomes questionsor comments at 888-572-7639 orinfo@krasneyfinancial.com.