Life Insurance For Physicians: An Actuarial Perspective

As a busy medical professional, you may not have had time to think about life insurance. However, having the right coverage is essential to financial planning and estate planning for physicians. In addition, disability insurance is another crucial layer of financial protection, particularly its role in income replacement during illnesses or injuries. Also, critical illness insurance helps cover costs that government and private plans exclude.

This comprehensive guide will explain what Canadian doctors need to know about life insurance. We’ll cover the key benefits, different policy types, how actuaries set the premium rates, the medical underwriting process, using insurance for estate planning, potential tax advantages, and how to choose the right advisor.

We aim to provide clear, unbiased information about life insurance for physicians so you can ask better questions and make better decisions. Protecting both your family and your medical practice in the event of death requires proper planning. With the right guidance, you can confidently put customized coverage in place.

Why Doctors Need Life Insurance

Death can happen unexpectedly. As a physician, you already know this all too well. While no one likes to dwell on the possibility of tragedy striking, preparation is critical.

Life insurance provides important financial protection if you pass away, especially during your working years:

• Replaces lost income so your family can maintain their standard of living
• Covers large expenses like mortgages, loans, college tuition, and daycare costs
• Provides cash (“liquidity”) for estate taxes, probate fees, and funeral costs
• Funds buy-sell agreements to facilitate the smooth transition of your ownership in a medical practice
• Offers tax-advantaged investment and savings vehicles to supplement your retirement income and complement your investment strategies

The right policies provide sufficient coverage, which gives you invaluable peace of mind. You know your family and business interests will be protected financially, even in the worst-case scenario.

Doctors tend to have high earnings but often lack proper life insurance coverage. Analyzing your income, debts, assets, and estate planning goals helps determine adequate protection. For many physicians, $1 million to $5 million in total coverage is enough.

Having a solid foundation of insurance in place lets you focus on your patients and practice. 

Types of Life Insurance Policies

There are two primary categories of life insurance available to Canadian doctors.

Term Life Insurance

Temporary “term” life insurance provides pure death benefit protection for a specified period or “term.” You don’t get an investment component that builds a cash value.

Term life is an affordable way to get a substantial death benefit for temporary needs like:

• Paying off a mortgage and other debt
• Covering the expenses of young children, including their future education
• Providing income for your spouse

To better understand how term life insurance can help you meet these needs and protect your family’s future, take a look at the following infographic:

This infographic illustrates the key benefits of term life insurance for physicians and how it addresses the unique financial challenges they face.

Coverage periods are typically 10 to 30 years. Premiums remain fixed for the length of the term. Converting to permanent life insurance is a common option prior to the maximum conversion age in the policy contract.

Once the term expires, you can often renew your coverage without underwriting, but your premiums will be higher because you are older and the underwriting is waived. If you do want some temporary life insurance to continue, new coverage is usually much cheaper if you are healthy.

Tip: do not cancel your current coverage until you have new life insurance in place.

Permanent Life Insurance

Permanent life insurance provides lifelong protection. Unlike term life, you can get an investment component that builds up a tax-sheltered cash value within the policy.

The main types of permanent life insurance are:

1. Term 100 – A specified face amount, guaranteed premiums, no cash value
   
2. Whole Life – A guaranteed death benefit, steady cash value growth, and stable premiums for a set period of 10 years (a “10-pay”), 20 years (a “20-pay”), or for life (a “life pay”). The 10 and 20 year premium periods (sometimes called “limited-pay” structures) fund all of the policy’s future charges in a shorter time and contractually guarantee that no further premiums will be required.
   
   A guaranteed limited-pay option can be attractive if you don’t want to worry about premiums during retirement. These structures generally cost less than paying for life. For example, a $1,000,000 whole life policy on a 50-year-old male nonsmoker would, by age 90, have premiums of about $550,000 as a 10-pay, $660,000 as a 20-pay, and $900,000 as a life-pay (based on BMO Insurance. Jan 2024).
   
   With whole life, the insurer invests the cash value without your input. This saves you the hassle of choosing the investments, monitoring their performance, and rebalancing them. 
   
3. Universal Life – More flexibility to modify the death benefit, choose the investments and adjust the premiums. You can structure a limited pay period as with whole life, with two major differences: future premiums may be required if investment returns are lower than projected, and the premium period can be almost any duration (not limited to 10 or 20 years).
   
   You select the investment options from a variety of choices that differ by insurer. Your premiums range between the minimum required for pure protection and a significantly higher maximum, allowing for significant tax-sheltered investment growth.

Universal life insurance policies were more popular before new tax rules implemented in 2017 affected how they performed. Whole life tends to be more common now, though there are still situations where universal life is the better option. 

Permanent policies cost significantly more than term policies but remain in effect for your entire life if you pay the premiums. The cash value accrues on a tax-deferred basis.

Many physicians use permanent life insurance for:

• Lifelong protection
• Supplementing retirement savings with a corporate insured retirement plan
• Funding buy-sell agreements
• Estate planning and legacy goals
• Asset diversification
• Philanthropy

The optimal mix between temporary and permanent life insurance depends on your budget, risk tolerance, expected lifetime coverage needs, and overall financial goals. Most of our doctor clients have both with the blend tailored to their specific situations.

Life Insurance Rates for Physicians

Your life insurance rates depend on factors including your age, gender, medical specialty, lifestyle, family health history, and overall health.

Factors that can increase rates:

• Smoking
• Medical specialties with a high risk of burnout, such as cardiothoracic surgery
• Pre-existing conditions like heart disease, cancer, stroke
• Obesity, depression, anxiety, and other conditions
• High-risk hobbies like scuba diving, rock climbing

Term life rates remain constant over the policy term and increase significantly with age if renewed. Permanent life insurance rates start higher when you are young but remain stable over your lifetime.

Getting Accurate Life Insurance Quotes

Premiums vary between insurance companies depending on their products, target markets and underwriting criteria. Shopping around is vital.

Getting life insurance quotes is easy. You can often request them online, where you bank or where you invest. Consider an independent insurance advisor with access to different insurers for better options.

Getting life insurance quotes is also risky. You may be tempted to choose the lowest price, but that could also bring you weaker guarantees. Since life insurance is a promise that lasts decades, quality matters.

Getting life insurance quotes is a poor way to compare insurance advisors. You will find the same premiums wherever you look. If you see a difference, the quote provider may have used a weaker product, a different configuration or aggressive assumptions.

To save you time, the family team at Taxevity does not provide quotes. Instead, we prepare personalized Insurance Options and explain them to you. To protect you, we use conservative assumptions and only offer products from a shortlist of insurers.

To start, we ask detailed questions about your situation:

• Date of birth, gender at birth, province of residence
• Current health conditions, medications, family history
• Lifestyle factors like tobacco usage, alcohol, hobbies
• Income, debts, assets, and other existing coverage
• Business and estate planning needs

Answering honestly and accurately helps us find optimal initial Insurance Options for your particular circumstances. If you have concerns about qualifying, we can get a tentative underwriting decision without identifying you.

Applying For Life Insurance

Before COVID-19, insurance applications were paper-based and completed in person in a time-consuming meeting. Nowadays, you complete an e-application in a short, convenient virtual meeting.

The Tele-interview

You can answer medical questions in a convenient tele-interview that takes place after the e-application. You select the date and time.

The tele-interview protects your privacy and saves you time. Previously, medical questions were completed on the application form and then asked again during an in-person paramedical exam.

The Insurance Paramedical Exam

To assess your overall health and life expectancy, a paramedical exam is typically required when you apply for:

• Permanent life insurance
• Term life insurance over $1 million in coverage

The exam is conducted by a paramedical professional, usually from Dynacare or ExamOne. You choose the time and location. There is no charge to you. The exam includes:

• Measurement of height, weight, blood pressure, pulse
• Collection of blood and urine samples
• Potential electrocardiogram (EKG), chest x-ray, or other tests

Your detailed medical history, smoking status, prescription medications, and medical specialty will also be reviewed as part of underwriting. Being completely transparent on the application is crucial – omissions or misstatements can lead to the denial of a claim later.

Life Insurance Underwriting Process

Underwriting is the process the insurance carrier uses to assess and classify your level of risk based on your exam results, medical records, and the details provided in your application.

After reviewing all of this information, you will be rated in one of several standard mortality tables:

• Preferred Plus or Select Preferred – These qualify for the best rates based on superb health.
• Preferred or Select – Slightly higher rates than the top tier, but still excellent health.
• Standard – Most applicants fall into this average risk category.
• Substandard or Rated – Higher rates apply due to existing medical conditions or other risk factors.
• Declined – ineligible for traditional life insurance, temporarily or permanently. Alternatives may be available.

The underwriting process aims to classify you fairly based on a life expectancy projection for people with a risk profile like yours. A rating in the Preferred tiers rewards healthier lives.

Simplified-issue life insurance products skip the paramedical exams and ask fewer health questions. The drawbacks are lower coverage (perhaps $500,000) and a higher cost per dollar of insurance. Benefits may be limited in the initial policy years.

We prefer fully underwritten policies despite the additional paperwork because they minimize the risk of your beneficiaries having a claim denied in the future due to incomplete information.

Tax Advantages For Incorporated Doctors

Incorporated physicians have even more opportunities to use the tax advantages of permanent life insurance with a cash value (whole life or universal life) in their tax planning.

“Cheaper” premiums

Insurance premiums come from after-tax dollars, which is why the death benefit is tax-free. A corporation is taxed at 12.20% on the first $500,000 of active business income in Ontario. In contrast, your personal average tax rate might be 33% or more. This means a corporation pays much less tax before having cash available to fund premiums. Using these tax rates, a premium of $1,000 requires $1,136 of pre-tax corporate income or $1,493 of personal pre-tax income. That’s a big difference.

Tax-deferred investing

In Ontario, each dollar of passive investment income inside a corporation is taxed at 50.17%. This tax does not apply to the investment growth within life insurance. This doesn’t mean all of your retained earnings should go into life insurance, but it can also serve as an attractive part of your investment portfolio. Maximizing returns within these structures require strategic planning. Learn more about investment strategies tailored for physicians.

Minimizing additional taxation

The tax rules for private corporations state that for every dollar of passive investment income above $50,000, five dollars of the Small Business Deduction is clawed back. This means that if a private corporation earns $150,000 of passive investment income, all of its active income will be taxed at (in Ontario) 26.50% instead of the first $500,000 being taxed at 12.20%.

As an example, a medical professional corporation earning $150,000 in passive investment income and $500,000 in active business income would pay $132,500 in tax. If that same corporation had enough of its investible assets inside life insurance to reduce what qualifies as passive investment income to $50,000, it would pay only $61,000 in tax.

Funding your retirement

After your cash value has grown tax-sheltered for a number of years, it should have a material cash value if it was managed well. Through collateral loans, you can get tax-free access to the money inside your corporately held policy, which has experienced and provided the above advantages. You can do whatever you like with that cash, though a common use is funding retirement goals like travel. The death benefit can then pay off the loan. Care must be taken to structure this strategy properly. 

Other benefits

There are even more benefits, but they are fairly complex and best explored in a consultation. 

The Drawbacks Of Corporately-Owned Life Insurance

The primary downside of owning life insurance inside a medical professional corporation is the additional complexity at the time of a death benefit claim.

With a personal policy, once the claim requirements have been given to the insurer and processed, tax-free cash is paid directly to the beneficiaries.

With an MPC as the policyowner, there are several more steps. They involve the new shareholders (your intended heirs) first receiving their shares and then declaring possibly two dividends:

1. A tax-free capital dividend in the amount of the Death Benefit minus the Adjusted Cost Basis. The insurance ACB is different than the conventional Adjusted Cost Base for typical investments. Confusingly, both are called an ACB. The insurance ACB changes with time and eventually drops to zero in the later years. In that situation, the entire death benefit can be paid out as a tax-free capital dividend.
2. A taxable dividend in the amount of the insurance ACB of the policy.

The process isn’t necessarily difficult but does add additional steps and work.

Corporate life insurance is an important part of most physicians’ financial and estate planning, for all the potential benefits it can bring you during your lifetime, and afterwards for your family and any charitable causes you want to support as part of your legacy. 

Choosing the Right Life Insurance Advisor

Navigating the world of life insurance on your own is difficult and time-consuming. Identifying the optimal insurance strategy, product, configuration, insurer, and ownership structure takes expertise. There are also the issues of getting ongoing service and support at claim time. Relying on an independent, experienced advisor team is often the best approach.

Doctors who choose Taxevity are looking for:

• Specialized understanding of physicians’ insurance needs and wants
• Access to pre-screened, highly-rated insurance carriers
• Strategies tailored to their unique financial situation and goals
• Explanation of options in simple terms without omitting important information
• A family team

A customized recommendation tailored to your circumstances provides the greatest value. Having adequate life insurance ensures your loved ones will be financially secure even in your absence. Discuss your situation in a private meeting.

Frequently Asked Questions From Doctors About Life Insurance

Here are questions that physicians often ask us.

How much life insurance do doctors really need?

A general guideline is 10-20x your annual income, but we recommend an analysis based on your specific situation. Most physicians get a face amount of $1 million to $5 million, blending temporary and permanent life insurance.

I have disability insurance. Do I still need life insurance?

Yes, they serve different purposes. Disability provides you with tax-free income if you can’t work due to an illness or injury. Life insurance provides a tax-free death benefit for your heirs or philanthropy.

Tip: if possible, get disability insurance while you are a medical student, resident or fellow.

I have significant savings. Do I really need life insurance?

No, you don’t need life insurance. Most of our clients want to preserve and transfer their wealth, but taxes get in the way.

In Canada, we have a deemed disposition at death: you are taxed as if you liquidated all your assets the day before you died. If you have a spouse who outlives you, most taxes can be deferred until their death.

Permanent life insurance can provide tax-free cash to pay the tax bills and an attractive after-tax return. Your executor won’t have to make tough choices about which parts of your estate to sell after you’re gone just to pay taxes on time. With life insurance, everything can go to your heirs whole.

Does life insurance cover suicide?

Most policies will cover suicide after the first 2 years. Suicides within 2 years of the policy being issued usually result in the premiums paid being returned to the estate.

Can I deduct life insurance premiums from my taxes?

Generally, no. A portion of the premium (the Net Cost of Pure Insurance, or NCPI) may be deductible if a lender requires life insurance as collateral for a loan. An accountant familiar with doctors’ insurance planning is key.

How long does underwriting take to get approved?

Typically, it takes 4-8 weeks from medical exam completion to receiving an approval decision. It varies by case. 

Do doctors get the best life insurance rates?

Not necessarily. Only those in perfect health will get “preferred” rates. Many physicians pay standard or higher rates, the same as most applicants.

What about my other questions?

At Taxevity, we’re here to help. Simply schedule a private chat.

Promod Sharma (FSA, FCIA) and Jeevan Sharma (CFP) YOUR FAMILY TEAM

At Taxevity Insurance, we’re passionate about bringing clarity to complex financial decisions. Let us empower you with personalized strategies to achieve your goals. We focus on life and health insurance solutions to protect your business, your family, and your legacy.