Financial Management
Life Insurance: Family Protection, an Investment Vehicle, or Both? By Wesley W. Lyon II, CPA, CFP®
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ver the last 18 months, my company has tracked the progress of over 200 dentists with whom we have consulted. We found, on average, dentists are overpaying for life and disability insurance by more than $4,600 annually. Assuming a 7% investment return and 30-year dental career, this is a $434,000 mistake! How can so many dentists overpay? The answer is simple — a lack of meaningful information combined with predatory sales techniques. Most dentists require life insurance for most of their careers. High student loan debt, combined with practice acquisition debt and real estate debt, can place a heavy burden on a surviving spouse. At the onset of your dental career, the life insurance need can commonly reach $8 million or more. In order to calculate your need, you must first calculate the amount of money needed to retire, and then add on your total outstanding loans. This number is different for everyone, as your spending habits will dictate the amount needed to retire. Once your need is calculated, the difficult decision of how to obtain this insurance comes next. Unfortunately for dentists, most insurance companies have placed a target on their backs. While some insurance companies truly look out for your best interests, most are seeking to maximize profits. We often see agents go as far as selling life insurance policies on your children, who are financially dependent on you. Mathematically, this makes zero sense. However, the fear of losing one’s child can spark many emotions.
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AGD IMPACT
SEPTEMBER 2024
Insurance as an Investment At this point in the process, you have a few different options, including permanent policies, such as whole life, universal life, variable universal life, etc., as well as term life insurance. Often, permanent life insurance policies are sold with additional benefits, such as being investment vehicles, acting like second retirement plans and generating tax-free income. On the other hand, term life insurance is very simple. You pay a set premium over the term of the policy, and, in return, you are insured for a specific amount. The downside? The premiums go down the drain if you don’t die during the specified period. While some might say this is a bad thing, I beg to differ. Term life insurance is the most cost-effective solution to protect your family due to the low premium costs.
Avoid Insurance as an Investment As mentioned before, permanent policies offer investment components as well as insurance components. I recommend avoiding these policies. They contain high fees, low returns and poor income tax treatment. Since these policies are deemed insurance products, rather than investment vehicles, standard disclosures and performance reports escape Securities and Exchange Commission regulation, oftentimes leading to misled consumers. The latest reliable published data on permanent life insurance comes from a 1979 report from the Federal Trade Commission. This report found that permanent life insurance policies had