How much life insurance is enough?

November 1, 2008

Delaying decisions about life insurance can result in expensive and unintended tragic consequences.

Key Points

Q My insurance agent recommends that I increase my life insurance coverage, but I'm not convinced I really need more. How do I know if I have enough life insurance?

When planning for survivor income needs, you will need to consider the ongoing income needs of your survivors, as well as any immediate lump-sum needs. When considering future income needs, the starting point is to determine how much income will be needed for the surviving family. Is the desire to maintain the current standard of living of the family, or will its needs be less? Will the family be staying in the same home or moving to a different location? Will the surviving spouse earn income, or do you want to provide sufficient income so that the surviving spouse will not need to work? From a lump-sum standpoint, would you like to provide a lump-sum payment for the balance of your home mortgage or other debt?

Consider why life insurance is purchased in the first place. People buy life insurance when they do not have sufficient assets to provide for their survivors. If you have sufficient assets, then you are considered to be self-insured. In many instances, a physician's greatest need for life insurance is early in his career, prior to accumulating substantial assets. There are many different types of life insurance products available to meet the varying needs of physicians. The key, regardless of the reason you are buying life insurance, is to be certain that the specific life insurance product you are purchasing meets your unique objectives.

Once you have defined the qualitative and quantitative needs for life insurance, you can begin to determine which specific product in the marketplace best meets your objectives. First, decide if your specific life insurance need is "temporary" or "permanent."

Temporary would imply that your needs are relatively short term. A good example is trying to provide survivor income in the event you die prior to becoming self-insured. Once you have accumulated sufficient assets to provide for your surviving family, you may no longer need the life insurance for that particular exposure.

Permanent insurance, on the other hand, is generally purchased with the understanding that the policy proceeds will be paid out at the time of your death, regardless of when that occurs, even if you live beyond your expected mortality age.

Q My practice now offers the option of investing in a Roth 401(k). Should I take advantage of this retirement savings opportunity?

A As its name implies, the Roth 401(k) incorporates elements of traditional 401(k) plans and Roth IRAs. Contributions for Roth IRAs in 2008 are limited to a maximum of $5,000 for taxpayers under age 50 and $6,000 for those 50 and older. The Roth 401(k) maximum contribution level, on the other hand, enables workers under age 50 to contribute up to $15,500, while workers age 50 and older are able to contribute as much as $20,500.

At that point, an employee currently contributing to a traditional 401(k) plan would have the option of simply having his contributions diverted to a Roth version of the plan. That election would impact the amount of take-home salary, since the contributions will be made on an after-tax basis, as opposed to pre-tax contributions made into a traditional 401(k) plan.