As seen in Physician's Money Digest

Have You Evaluated Your Policy Lately?
By Donald T. Cohen, CPA
Newman + Cohen Financial Management

Every year, physicians purchase term life policies to protect their families and business partnerships. Once purchased, the policies are typically placed in a file, where purchasers forget about them. With all term policies, the owner pays a premium in exchange for the insurance company's promise to pay the death benefit, as long as the insurance coverage is in effect at the time of the insured's death.

Term policies build no cash value and are initially less costly than permanent insurance products. Most term policies provide for an annual right to renew until an insured reaches age 90 with a few caveats, including:

DECIDE WITH CARE

Assuming you purchased your term insurance coverage more than 3 years ago and you have addressed the above-mentioned issues, you still may want to consider reviewing your term coverage. The life expectancy of our population is increasing because of medical advances. Thus, the cost of term and all other life insurance has decreased.

Although you are older, you still may be able to purchase new policies with premiums significantly lower than those that you're paying. Also, if your current policy contained a rate guarantee of 10 years and you are 3 years into your coverage, a new policy may add additional years to your guarantee period at this lower price.

Before you decide on term insurance, please remember that the synonym for term insurance is temporary coverage. Term insurance is used to protect for a finite period of time and, if held for many years, will ultimately become too costly to renew.

For example, a 45-year-old preferred male could purchase a $1-million, 20-year level term policy for a relatively affordable amount. However, if he is still alive at age 65 and needs to maintain the coverage but is not insurable elsewhere, the cost to renew in succeeding years could be as much as 20 times the initial premium in year 21, 30 times the initial premium in year 25, and more than 50 times the initial premium in year 30.

CONSIDER COSTS

Although the premiums on a whole life insurance policy may be higher in the early years of the contract, the owner/insured would benefit from significantly lower premiums from year 21 on, as well as tax-deferred accumulation of cash values during the life of the policy.

If there were a need, the policy owner would also have the option of borrowing against the contract's cash value or withdrawing funds in the form of partial surrenders. Provided that the policy was not a modified endowment contract and partial surrenders consisted of cost basis, these transactions could be achieved without adverse tax consequences.

Of course, loans would reduce the cash value and death benefit by the amount of the loan outstanding, plus interest, and partial surrenders could result in surrender charges.

Term insurance is a very important component of a physician's financial plan. It will protect an insured for a temporary period of time. It should be the responsibility of a financial management professional to help you determine whether term insurance is the most effective product for you. If so, please be aware of the issues relating to term insurance, inclusive of the cost of this product

Donald T. Cohen, founder and director of Newman and Cohen Financial Management, has more than 20 years of experience in public accounting, advanced financial strategies, and business management for physicians and other high-net-worth individuals. For more information, visit www.newman-cohen.com