The Physician’s Life Insurance Primer – Should you own life insurance on others?
The primary reason most people own life insurance is to ensure that their loved ones will have the means to replace lost income and pay for their financial obligations in the event of their premature death. In fact, life insurance is a critical financial tool in any circumstance in which the premature death of an individual could result in a financial hardship on another. So, while owning it on your own life may be the best possible use of life insurance, you may want to consider all circumstances in which it could provide essential financial protection for you, your family or your business. Read more to learn more about who physicians should consider insuring.
Your Insurable Interests
Life insurance can only be purchased on the life of another person when there is an “insurable” interest – that is, where the death of that individual could create a direct financial hardship on the policy owner. Who are your “insurable interests”?
It’s not uncommon for the family breadwinner to own life insurance on his or her life while the non-working spouse is left uncovered – the thought being that there isn’t any income to replace at his or her death. The fact is that the loss of a non-working spouse can create a significant financial burden on the surviving family. Aside from final expenses, the cost of replacing the services of a non-working spouse can amount to tens of thousands of dollars each year, including child care and domestic help.
Many parents don’t like the thought of buying life insurance on their children; however, from a practical standpoint, the death of a child can create a financial hardship. Another practical reason to buy life insurance on children is to provide them with a policy they will be able to take on for themselves once they become an adult. Buying life insurance at a young age can lock in very low insurance rates and their insurability.
If your parents own a sizable estate, and they don’t own a sufficient amount of life insurance, you could find yourself shelling out a big chunk of change to pay estate taxes and other estate settlement costs. While this might not be a problem is there is sufficient liquidity in the estate, if there is not, you may have to sell off property to cover the cost. It makes good financial sense to protect your future estate from unnecessary expenses.
If you’re a business owner with employees you consider essential to your business, you have an insurable interest in their lives. A key person is someone who, if they were to die prematurely would create a financial hardship on you or your business. It could be a business partner, or your top product developer, or even a top flight office manager. The cost of replacing a key person can sometimes cripple a business especially if their death results in a loss of revenue to the business.
The death of a business partner can create problems for surviving business partners when their significant equity ownership. When an equity owner dies, his or her family will want to receive their proportionate share. The surviving business partners must be able to come with the capital to buy out the surviving family. Without a source of capital, the business owners could be required to liquidate all or a part of the business to fulfill that obligation.
Check out other articles in The Physician’s Life Insurance Primer series: