An Optometrist's Guide to Life Insurance

And if this is your first time listening, welcome to the show. And September is life insurance awareness month. And onto this episode, I'm going to take that theme and opportunity to talk about what I feel is a pretty important subject. And that's protecting yourself through life insurance. And we're going to dive into the what life insurance is the uses of it. How to figure out how much life insurance coverage you need.

The different types of policies and all the different things you need to keep in mind. When looking at that, so we're going to dive into a big overview of the, of the general, Of the general basics of life insurance and what you, as an optometrist need to know about it. Before we dive into that, just want to say that if you are heading out to vision expo west next week in Las Vegas, reach out would love an opportunity to meet you and get to know you and learn about the things on your mind.

The things you like about the podcast, how I can make it a better resource for you. So it would be great to get a chance to meet you over there. But with that being said, let's go ahead and dive into the topic here.

So what is life insurance? Well, life insurance is just an insurance contract between you and insurance company. Where the insurance company agrees among other things to pay a death benefit to you at your death. It's a way to transfer the, at least the financial risk of you passing away of your death. And the financial impact that the loss of your income over your career has on your family and, and whoever your financially responsible for.

It's a way to transfer that financial risk off of your shoulders and put that onto an insurance company. Just think about managing the different financial risks in your life. There are those that have a really high probability. They have a really high chance of happening. but won't cause massive financial issues like a car maintenance or you need a new air conditioner or things like that. You know, those risks and expenses are things that you'd want to save for out of your cashflow.

And just have an appropriate emergency fund. Right? So that, that emergency fund is sort of the first step of risk management. And it's just able to tackle those things that. That are either expected to come up or are unexpected, but aren't expected to have a massive financial impact on you or your family. But then there are the big risks, the things that aren't really likely to happen. But if they do happen, they have a substantial impact on your family and your business financially.

And those are the things you want to insure. Those are the things that are best suited for an insurance company to take on. And it simply probably doesn't make sense from an economic standpoint for you to keep that risk on your shoulders. And death is unfortunately, one of those risks. It's. A tragedy like that is not likely, you're not expecting a, to pass away at least a young right before your life expectancy, but unfortunately it's quite possible.

And this can lead to a massive financial gap for a family. And that's where life insurance comes in. Life insurance has one incredibly important job for a family. And that's to replace the financial loss from you or your spouse's death. If you're married. The financial company provides a what is generally a tax-free death benefit to your beneficiaries? It's a risk management tool. And when do you need it? Well, as soon as you're financially responsible for someone else.

So common triggers to buy or review a life insurance coverage is marriage. Buying a house. When children are born. Having a co-owner in a business perhaps, or large increases in income. New large substantial debts, like mortgages, things like that. Generally speaking, the younger and healthy you are the cheaper, the cheaper that your premiums are going to be. So something to keep in mind.

Because when you're applying for coverage, you're going to need to go through some form of health underwriting. So they're going to ask you for a whole lot of questions about your health history. They're going to dive into your health history. So. Premiums are going to be based on your age and your, your health. And how

do you know how much life insurance coverage to get? What is the right amount? Well, there's no one right answer for everybody. There are some rules of thumb. But those only really go so far, right? Like 10 times or 15 times your income or, or something like that. So as you're thinking about what amount of coverage to get, think about the risks that you're tackling. For typical family planning, you're trying to replace the loss of income. In trying to tackle those expenses that your your family.

Wouldn't be able to cover now because your, your income is no longer there. And your income potential, right? So all of the income that you're expected to earn over your career, So start by thinking about what assets and what coverage do you currently have? What is the ideal scenario talk with? If you're, especially if you're married, talk with your spouse about what's that ideal scenario that you would want to create for your family, if you pass away.

What income would you need to replace and for how long, what are the expenses that you would need to have covered? What's needed to potentially create financial independence for your family. What can you reasonably expect your spouse to earn while working if that's desired? Meaning if, if you and your spouse are expecting to and desiring for your spouse to continue working at, at your death. What debt payments or debts, what continue at your death? Student loans come into this.

For example, if you've refinanced your student loans out of the federal student loan system. What does your promissory note say is going to happen with that student debt at your death? What are other goals that you have such as college costs for kids or, or creating legacy goals for family or organizations or nonprofits or church? Are there family members with disabilities or special circumstances that you would want or need to have covered at your death?

What reasonable rate of return would you expect to earn on a lump sum death benefit to help cover all these things? So all of those factors and more would help to figure out that actual need of a death benefit. And there are calculators to help you project your need out, I'll add links to some of those in the show notes. So those are, are a good place to at least start with and start to project that out. I think that's a reasonable. Way to go about it.

We as financial advisors have our own systems to calculate the need often in light of, what's needed for financial independence. And all of the factors that I talked about above. So those are some things that you want to think about as you start to project out what is an appropriate death benefit for you and for your family? And. There are other needs for life insurance as well that have different approaches to calculating that death benefit needs.

You know, for example, in a business planning scenario where you have a practice with multiple owners, let's say you're a co-owner. In an optometry practice with another optometrist. One thing you'd want to plan for is what happens with your partner's ownership interest if he or she passes away. Well, ideally, you'd probably like to purchase those shares that, that ownership interest from your partner's estate or spouse. So, how do you fund that purchase?

Well, life insurance can come into play here. And hopefully you would have met with a good attorney and got a well thought out, buy, sell agreement as a part of your legal documents there that addresses all the different, what ifs in the, in the practice. And one common thing that's a part of that where there's a small number of co-owners is what's called a cross purchase buy/sell, where there's a set way to determine the value of the practice.

Each owner would personally own a life insurance policy on the life of the other owner. And if your partner passes away, then you'd use the death benefit to purchase the shares or ownership interest. From that estate or from the spouse. So in this case, the amount of coverage is determined by the value of the practice. So you can follow, you know, whatever method that you've used to determine that in that buy, sell agreement.

So. You know, other other uses of insurance have different ways to calculate the need, but for. For basic family planning purposes. Think about all those different factors above. Ultimately what it's going to boil down to. In some way. Is the combination of the lump sum cash needs you'd need to tackle at your death. And the ongoing income you'd like to provide. And how long you'd like to provide it.

And then you can work backwards towards the dollar amount that would cover those lump sum cash needs. And roughly have the present value of dollars that if invested at a certain rate of return would provide that income over the period of time. That's sort of what you're solving for as you're, as you're trying to, as you're trying to figure that out. So

what are the different types of life insurance coverage? Well, there are two major types of life insurance. Number one is term insurance and the second is permanent life insurance. And term insurance kind of, as it sounds, it lasts for a particular term. So, or an amount of years. It could be 10 years, 20 years, 30 years. And what's most common that you'll find is that you'll have a term insurance policy. That's going to have a level premium, over that 10 and 20 or 30 year period.

And it may expire after that, or often what you can find is that the policy can continue, but it's going to continue at a, an extraordinarily high premium rate. And probably increases every year after that. So. Usually speaking, we're looking at a certain period of time. And it's pure risk management. Right. All you're trying to do is cover the financial risk of death within that certain period of time. And there are features that you can add to these policies, right?

So even though it's sort of plain vanilla risk management, it's covering that risk. Of death over a certain amount of years. And there are features that are, that you can either add or already in these policies that, add some flexibility. Then number one is that. You usually can find convertibility within these term insurance policies. What that means is that you can. Convert some of, or all of the death benefit amount into a permanent type insurance policy, like a universal life policy.

Without having to go through health underwriting and the premiums that you're going to pay. And that, that new separate policy are often based on the age that you do that, but that gives you some flexibility in that if you have a change in your health and you're no longer insurable, for example, and you're expecting to need coverage after the term policy is going to expire, at least you can know you can convert parts of it into a permanent policy and continue some form of coverage after that.

Another thing you're going to find is is something like a terminal illness rider where you can get access to parts of the death benefit. In the event of terminal illness and you're expecting to pass away within 12 to 24 months, something like that. So you've got some flexibility there. You can often find a waiver of premium rider. So it's going to waive the premium in case of disability based on their definition of disability.

So there are some things you'd want to look for in a policy like that, that you can either add onto it or already going to be in the contract. But that's term life insurance. The other general form is permanent life insurance. Which in theory is meant to last over your entire lifetime, right? It's it's supposed to be permanent. And in a very simplified way what you're often going to find is that a permanent life insurance has two parts to it.

It has the death benefit component, similar to that term policy so it's just, this permanent coverage of, of life insurance with a death benefit. It has that insurance part, but it also has separately this internal cash value part of the policy, which is this internal account that grows within the policy. And how it grows depends on the type of policy you have. The amount that's in that that account is going to be growing.

In a way that's tax deferred, meaning that the interest or growth of the account are not included in your income as it's growing. You would have to totally withdraw or surrender the policy and the growth of the account above your premiums would be considered taxable income at that point. But as it's growing, it's going to be tax deferred.

And you'll often hear about ways to get access to that cash value either through, with, partial withdrawals or surrenders or by taking loans against the policy. But we'll, we'll save that for a future episode, but there are certain ways that you can get access to that cash value while it's growing. And within permanent life insurance, there's two main types of permanent policies. There's whole life insurance, which is known more generally for the guarantees of the policy.

Guaranteed death benefit, guaranteed premium. And what you're going to see over the life of the policy. And then there's universal life insurance, which tends to be known more for its flexibility, especially in adjusting the premiums over the life of the policy. And even within these two categories, there's several types of policies, all with their different flavors and details and nuances.

For example, there's participating whole life versus non participating whole life where participating policies are or able to, can receive dividends from the insurance company, which are sort of treated as a tax-free return of premiums. There are also fixed rate, universal life policies. There's variable universal life policies. Where the cash value is actually invested in mutual fund like, options called sub-accounts.

Or, and so the cash value will fluctuate up and down based on the performance of those sub-accounts those investments. There's also indexed universal life policies where the cash value growth or, or the crediting rate, right? The, the amount that's added to the cash value each year. Is tied to the price change in some index that the insurance company chooses. It could be a, a well-known one like the S&P 500. Or it could be some obscure made up one. That they're using for the policy.

Not including dividends, so it's just based on the price change. And it's, it's important in these to highlight that. In these indexed life policies it's the cash value's not actually invested. You're you're not invested in the market. Like you would be in a variable UL policy. It's that the growth that's credited to the account. To the cash value is determined by the price change in this investment index, not including the dividends. So these policies are pretty complicated, right?

And that, that can be said at some points about all of these different permanent type policies. These policies typically would not experience. Market losses, meaning that even if the index had a decline. The cash value is not going to have a negative performance. It's going to have a 0% floor. The, the variable policy, right. It's going to fluctuate up and down based on the performance, but these index policies will usually how they floor at zero, 0%.

However, the cost of the policy still may need to come out of that cash value. So your cash value certainly can decline. It wouldn't be from the performance of whatever the index is, but the due to the costs coming out. So that's something to keep in mind too. It's also important to note that they're often caps on the amount of growth of the index that you actually get. For example, if the cap of the policy is 6% and the index price increases by 10% in that year.

You're not going to get that full 10%. You're going to get that 6%. Right. And the insurance company will keep the, the remaining amount. There's also participation rates where your policy may only receive a certain percentage of the price growth of that index. So you may only get 80% of the increase of that index growth. So there are a lot of little limitations or details when the, within indexed universal life policies and, and just within these permanent type policies in general.

But hopefully that's, that's the high level overview that's helpful as you kind of get an idea. Or at least get a, get a feel for what these different options are. And they can range from very simple to, to quite complicated, and they can also be built or created for different purposes. They can be built specifically for the death benefit. Or they can be built specifically for the growth of that cash value.

And how it's, how the different features are adjusted within these policies can determine how that goal is, is fulfilled.

So knowing that there's different types of policies and knowing that even within these policies, there's all different sorts of subtypes, right? Within whole life universal life. What is the type of policy that is best? Right. What type of policy should, should you be looking at? Well, remember, these are all just insurance contracts, right? They're all just tools. And each tool has a particular use that it's best suited for. So it really depends on what your needs are. Start with your need.

Right? What is the risk that you're trying to tackle? What is the purpose that you're trying to fulfill? What's the goal. And then figure out the product that's best suited for that goal. That's best suited for that need. So for typical family life insurance planning where you're trying to manage the risk of protecting your family from you or your spouse. If you're married. From the huge financial gap that's created from, from the loss of income at a death.

For that typical family life insurance planning need. You know, think about that risk at some point. The goal as you're building wealth is to become financially independent, right? So you you're building up your assets and sources of income. To at some point in your career later on in your career cover your lifestyle needs hopefully for the rest of your life. At that point, once you're financially independent, the need for life insurance becomes optional.

You no longer face that massive financial risk. So the time of the biggest need, when you're thinking about again, just typical family, life insurance planning. Is from early in your career peaking as your family grows, maybe mid-career or so, and then tapering down late into your, into your career. Until you're financially independent. So knowing that it's sort of a temporary need, right? It's not necessarily a permanent need over your entire life.

But it's sort of a temporary need over your career. This type of life insurance planning tends to be a best fit for term life insurance for, for most of these family planning situations, because term life insurance is going to allow you to get the biggest amount of benefit that you actually need most affordably. Now I can't say always, right? Because perhaps there's situations where permanent life insurance is a better fit for certain families or for certain family planning goals.

But for the vast majority of these basic family life insurance needs for, for this type of risk management. Term life insurance is going to be the product that fits your needs. Now a common thought about term life insurance is that if you don't use the policy and it just expires after the 20 years, 30 years or whatever it needs. You're just wasting dollars. You know, once it ends all those premium dollars that you paid are just gone. Is that true?

Well, I think that's actually pretty wrong for two reasons. Number one is that. You don't actually want to use the policy, right? You don't want that risk to happen. So you should hope to burn every premium dollar. You don't want to actually take advantage of the death benefit. Secondly, this is not true because when you're paying a premium, you are paying for something it's not wasted. Every month that you're making that premium.

You are continuing to take that financial risk off of your shoulders and put it onto an insurance company. That transfer of risk off of your family onto an insurance company is valuable. Right. That risk, that risk transfer is meaningful. And ultimately it's that transfer of risk, that's what you're paying for in your premiums. So every month you're making that payment, you're paying for something that's valuable and that's that transfer of risk off of your shoulders.

And that's why I think that life insurance is, is an awesome planning tool. I mean, some people simply do not like insurance and think it's a total waste of money across the board. But I think life insurance is an incredible planning tool. It allows you to, to think about this big financial risk and do you think about how you would like to tackle it? In what way specifically? And to put a policy together that takes that risk off of your shoulders and puts it onto an insurance company.

And as long as that insurance company is, is around, that insurance company is going to pay out according to the contract. So this allows you to, to plan proactively to build wealth and to and to live life in a way that you wouldn't necessarily be able to plan for without this type of insurance around. So something to think about there, if you're ever thinking about, are you wasting these dollars by having term coverage? Hopefully those things will, will persuade you to think otherwise.

So term coverage is I think is a great fit for many, if not, most, typical planning scenarios for an optometrist. And you can add onto it with additional term coverage. You can replace it with future new term policies rights. So you're able to adjust the coverage as you go by adding onto it, stacking on top of it with new life insurance coverage, or replacing an altogether with a new term policy. Of course you don't want to. Cancel your current term coverage until your new policy is inforce.

You always want to make, wait until you have that new coverage in force, but, certainly you can adjust the coverage as you go. So what about permanent cash value type policies? Where do they fit? There are a lot of strong opinions about these policies. On the one hand there are opinions that these policies are garbage and should never be used for any purpose.

And on the complete total opposite side of that spectrum, you have strong opinions that these policies are everything they should be used for all things. All financial planning issues, including the death benefit, retirement planning and retirement income. Solving world peace and world hunger. Right? So usually those opinions are going to be seen from the one selling the policies, but there are very strong opinions on all sides.

But let's, let's try to be objective here because again, these permanent policies are just a tool. It's just a product, right? They are just life insurance policies. And all products have a fit somewhere. So there are some uses where a permanent policy. Can make sense. And those uses are aware there's a permanent need for coverage or a permanent risk to tackle. So estate planning is a good example of this.

So if you have a high enough estate where you're expecting to pay state taxes at your death. Federally speaking. You know, each state's going to look at that a little differently. Or at your spouse's death then using life insurance can make sense as a means to cover that estate tax. You know, especially if there's an estate with a lot of illiquid assets, like real estate or, or private business or private practice, for example.

And you'd rather not have a fire sale on those assets to cover cash needs like taxes. You know, that estate plan that life insurance can create the liquidity you need to tackle that. And. The current lifetime estate tax exemption for your lifetime gifts and estate state tax federally speaking in 2023 is over $12 million per person. And that's indexed or increasing for inflation each year and a married couple can essentially double that.

So at the moment you'd have to have an estate valued above that to see federal estate taxes. I'm not sure that there are many optometrists facing that issue. There are tax laws that are currently set to expire after 2025. And that will roughly bring this exemption back to what it was before 2018. You know, including inflation that might look somewhere around $6 million a person after 2025.

And while we've seen even lower exemptions in the past, again, I'm not sure you listening right now are going to face a serious need for this, at least at the moment. But if you do, you probably, want to work with a solid estate planning attorney and tax planning team to work through ways over your lifetime to limit the estate tax you'd pay. Perhaps through a lifetime gifting or trust work, but life insurance often in like a revokable life insurance trust. I'm sorry.

An irrevocable life insurance trust at can be a helpful way to provide cash for, for an estate tax due. On the topic of illiquid assets, I've seen permanent life insurance is used to equalize and inheritance. When one member of the family is set to inherent ownership of a family business, for example, and the others are not, sometimes you might have other assets or life insurance. As a way to sort of equalize the inheritance.

If there's a special needs family member funding, a special needs trust at your death. That's something you may want to think about. Anytime you want to leave a guaranteed legacy, right? This is gonna provide sort of a legacy floor that regardless of what the other assets do. You can leave a guaranteed legacy to friends, family, organizations, schools, nonprofits, churches, whatever this may be.

This sort of permanent desire to leave something and provide liquidity is, is why permanent life insurance exists. It, you have a permanent risk or need over your lifetime and you have these type of policies to provide for that. Interesting business needs for a corporate owned life. Insurance may come up.

I've seen cash value, life insurance work as the funding tool for non-qualified deferred compensation plans in businesses before usually where you have some sort of like middle management or sales team, or you want to provide a benefit plan that's not connected to the ERISA laws and requirements of 401k plans. So in some businesses like that, I've seen something like that work. And then lastly, lastly, they can be used for their ancillary benefits for the cash value.

As an additional way to save by using the cash value of the policy. But these are specific cases, right? These are not where every optometrist needs to go out and focus on this. Where you, if you've maxed out all other forms of tax deferral through 401ks, HSA's, IRAs. You have plenty of liquidity and funding in taxable investment accounts. You're already saving a substantial amount for that. Your practice is funding all necessary or planned investments, right?

So your, your practice as an asset is already being invested in, and that that practice is fed. And you still still have significant dollars you'd like to save and receive a tax deferral long-term. And you're planning to stick with it long-term. Then perhaps, perhaps, a policy that's designed specifically for this purpose, not for the death benefit, but for the growth of this cash value may make sense.

But this is certainly an outlier and not necessarily something that every optometrist needs to focus on as a part of their, their wealth building. Because remember this is first insurance. This is first a tool for risk management. It has these ancillary benefits of the cash value. But remember, first and foremost, these are tools for risk management. And not wealth building tools. So there are legitimate uses for these cash value type policies.

And, and they get a bad reputation often for good reasons. But the problem isn't necessarily what the products or policies themselves remember. They're just tools. It's the way that they're sold and marketed.

And you really need to keep an eye and just keep watch on this because they're often sold for the wrong fit and in situations where it was not necessarily in the best interest of the client or where there were other tools or products or accounts that could met that goal more easily or more, more efficiently, or at lower cost? They're often marketed and sold to be a savings first vehicle. Often called the only savings vehicle and investment vehicle you need.

In the worst cases, I've seen videos and social media posts where they're literally advising you to withdraw all of your retirement dollars, pay the tax and penalty on it. And put that cash into these life insurance policies. Often times you'll see this marketing using inaccurate or exaggerated claims about the policies. Or other types of investment accounts or retirement planning or tax law, or just a misunderstanding of basic financial planning principles.

It's sort of the wild west in the insurance marketing world when it comes to social media and videos and I've seen over the last year, just sort of an explosion of, of these videos and marketing that are just, that are wildly at times, inaccurate or exaggerated. And entirely misleading. And I've seen this in my own experience.

My first couple years in this profession, were at a large financial company that sold insurance products and sold financial products like insurance, like mutual fund, like a group insurance plans, things like that. And I remember conversations with the wholesalers, trying to pitch their certain type of cash value life insurance policies and all of the, the benefits of that policy versus, you know, the 401k and all these other things.

But. These over-simplified comparisons are often inaccurate, misleading, and you really need to be careful about them. And they're often using fluffy names to market these policies and never calling them life insurance. Using, maximum accumulation accounts or compounding accounts or 7702 accounts is trying to give it some credibility based on the tax code that talks about life insurance or. Or the rich man's Roth IRA or something like that.

Interestingly never actually call and get life insurance. But that's basically just what it is. So just be careful when you hear marketing, making it sound like it is literally all things to all people. That it is the thing you should be using. If you ever hear that 401ks are scam and that this is what the rich people do, and don't want you to know about. Those two things are usually going to lead directly to some sort of product sale. All right.

So just be careful because I've seen an explosion of this marketing over the last year, especially on the internet and social media and video. So just keep an eye on what you're hearing and if it sounds too good to be true, it probably is. But there are specific uses for these type of policies for specific situations. And it tends to be few and far in between when it comes to an optometrist like yourself.

And lastly, as you purchase insurance and get coverage, keep an eye on who the beneficiaries of the policies are. Do you have both a primary, any contingent or secondary beneficiary named? Where that contingent or secondary beneficiary comes in is that if something happened to your primary beneficiary or if you had both passed away at the same time, there was a secondary person to take that death benefit. Otherwise it would just go to your, generally to your estate.

Are those beneficiaries up to date with changes in your life? And in sort of the worst case scenario is I've heard situations, stories where people have gotten divorced and never changed their beneficiaries from their ex spouse, or they have kids and haven't considered those kids as a part of the beneficiaries or, you know, whatever it may be. Just make sure that as your life changes, you're reviewing these beneficiaries, as you go on and how do they fit with your overall state planning?

You know, for example, if you have a trust that's expected to receive those funds and manage that those funds in accordance with what you put in that trust. Is that trust named as a beneficiary? And keep an eye on this. Keep an eye on the beneficiaries. And making sure that they're updated as you go. This is something that I review. Throughout the years with my clients, these are things that we'll track and make sure that as changes in their life happens. These things can get updated as well.

So, hopefully this was a good general overview of life insurance next in the next couple of weeks. Next couple episodes. I'm going to dive further into a permanent type life insurance policies and trying to separate out the myths versus fact of life insurance marketing. Because again, as I'd mentioned, The marketing around this, I feel like has exploded recently. Maybe I'm just starting to pay attention more. And you as an optometrist, you're sort of a target.

You're a relatively high-earning professional. You're sort of a target for these types of things. And, and I want you to be well equipped to make educated decisions as these things come up. So follow along over the next couple of episodes. Reach out to me. If you have any questions. And as you shop for life insurance, right? I don't personally sell life insurance anymore. I have a fee only financial planning firm, but I work with independent brokers that can shop with multiple carriers.

So as you're going through that, Keep in touch with your professionals. Talk with your financial advisor to have a good connection to an independent broker that can shop different carriers. And ultimately get you the best policy with the correct amount for your particular situation, for the goal that you are trying to solve. And keeping in mind, all of the things that can go into the underwriting, like your particular health situation, that the particular habits in your life, things like that.

Just lean on your professional team to guide you through these decisions here. So let me know if you have any questions you can reach out to me by email Evon@Optometrywealth.com. You can check it all the links and information resources. I mentioned in the show notes, which you can find at the Education Hub at my website. Www.optometrywealth.com/education. And while you were there, you can also feel free to reach out and schedule a time to have a no commitment, introductory call.

And we can talk about whatever is on your mind financially and how I help optometrists all over the country solve financial questions like this and more. So we'll catch you on the next episode. Hopefully I'll get a chance to meet you at vision expo. If you'll be there, reach out, would love to get a chance to meet you. And in the meantime, take care.