Written by: Peggy Haslach
The life insurance gap? What is it and why is it concerning for female doctors, lawyers, veterinarians, and other licensed professionals?
Lately, we have heard a lot about the gender pay gap. It came to the forefront when the USWNT won the world cup in July. Well, there is another gap for American women that needs to be addressed: the gap in life insurance coverage. Fewer than 52% of women have life insurance compared to 62% of men and the amount of coverage women have is 31% lower. Why is that? In my opinion, it boils down to two things: how life insurance is sold and how financial decisions are made in a household.
Let's talk about how life insurance is sold. When I started in the industry, the amount of life insurance that an individual could get was based on income. The working spouse, usually the husband, could apply for a multiple of their salary. For example, a 45 year old male with 20 years left in the workforce could apply for 20 times his annual salary. In contrast, the most the non-working, self-employed or part-time working spouse could get was enough to cover the mortgage, if that. It was not uncommon that I would have a husband apply for $2 million in death benefit and have his wife apply for $100,000. Fortunately, most insurance companies have changed their underwriting guidelines and are now acknowledging the value of the non-economic contribution of the non-working or lesser paid spouse. Now both spouses can apply for an amount that is based on the income of the spouse who makes the most. Hopefully, that will help bridge the gap, but it is going to take some time to reduce the gap that was created over the years.
The second and more prevalent reason has to do with how couples looked at their situation when they were applying for life insurance. The logic was that the husband would get a policy with the higher death benefit because he made the most and was more likely to die first – and his death would have a major impact on his family’s ability to continue their standard of living. When I asked, "What happens if your wife dies first?” he would reply that he would "be fine." I don't know how many times I heard a husband say, "Even if I outlive my wife, I will be okay because I can still work." There was no thought given to what the family (including the husband) would need to compensate for what the wife had been providing – or even that there was actually a monetary value to the wife’s contribution to family life. That short-sighted logic still exists, and though it does not work along the same gender lines or household roles, it still leads to women getting less insurance.
We need to change that thinking, especially when it comes to doctors (and lawyers and veterinarians). More and more, these women are becoming the primary breadwinners in their households. It usually does not start that way. When they are in grad school or residency and eating ramen three times a day, they don't think they can afford life insurance, especially if they graduate with a boatload of student loan debt. Once they get into their first contract, their salary jumps significantly, and their take-home pay may bypass that of the spouse who did not get a graduate degree. If they anticipate this and calculate their needs based on their potential future earnings, they can apply for a policy when they are young and healthy and when life insurance is the least expensive.
Why is getting Life Insurance a good move for female professionals?
One reason is divorce. Unfortunately, statistics show that female doctors who are the main breadwinner in their household are more likely to get a divorce. If their income is significantly more than their spouse’s, they sometimes end up having to pay alimony and child support. Since the obligations of alimony and child support do not end with death, often the divorce decree will require the breadwinning spouse to get life insurance to cover the alimony and child support in the event they should die. If they can't get insurance, the decree will state that the obligation would be covered by a lien on their real and personal property.
This was the case of a veterinarian I know. The policy she had from her work was not sufficient to cover her obligation, so her divorce decree stated she would have to get more insurance. "Yep," she told me, "This in addition to having to give up half of my IRA. I feel like I will be stuck working for this (corporate-owned) vet clinic for the rest of my life!"
A lawyer I know was more fortunate. She had the foresight to purchase $2 million in life insurance when she graduated from law school. When she got married, she and her husband each bought $2 million policies. Twelve years later, when she was a partner in a large firm, he lost his job and she filed for divorce. She says she was lucky because she had enough insurance in place to cover the child support for their two children and his alimony. Plus, she had enough life insurance left over to have the coverage she needed to transition to private practice, which is what she wanted to do after the divorce so that she could spend more time with her children.
Entrepreneurship is another reason why women need to own life insurance. In the past 20 years, the number of women-owned businesses in the US has increased 114%. When these women leave their corporate jobs, they often must leave their benefits behind, because most employer-provided life insurance policies are not portable. But if they purchase a personal policy before leaving, they would have a policy that can stay with them wherever they go. Having a policy in place would also be good because many small businesses have limited benefits and do not offer life insurance. Plus, life insurance can be a very useful tool for practice owners. It can be used to fund buy-sell agreements between partners and can cover business loan obligations. It can also be used to cover operational costs while a business is being sold or transitioned during an estate settlement.
For the practice owner, however, the most important reason to have insurance in place is what happens when they die. In professionally licensed practices, the owners usually must hold appropriate licenses. That means that if they die, the practice must be transferred or sold to someone who is properly licensed. This is usually not a problem for partnerships or large corporate entities. But for small one-woman practices, their death can be the death of their business as well. That is why practice owners need to have clear succession plans. Life insurance can play a crucial role in those plans. For instance, if a licensed professional dies, having a policy in place would give the surviving family the funds needed to wind down the business or bring in a professionally licensed individual to continue the practice.
How much life insurance does a female doctor need?
There is no one correct answer to that question. It is not one size fits all. Sure, there are underwriting guidelines based on age and income, but there are many different types of life insurance available, and every person’s situation is unique. The best answer is to work with an independent advisor who can help you calculate your need and go into the market and find a policy or policies that will work for your situation.
For example, if the best fit is Term Insurance, then look for a policy that is convertible to a permanent policy through the length of the term. When a policy is convertible it means that it can be exchanged for a permanent policy without going through underwriting. This is a good option if you develop a health issue that makes you uninsurable. When you convert a policy, you also want to know that the permanent policy you get also is appropriate for you. Not all permanent policies are the same. Some offer additional benefits (called riders) that could be helpful in the event you develop a chronic illness or need Long Term Care.
Work with an advisor who is experienced at working with women like you.
When working with female doctors, lawyers and professionals, I have a process called MYOM, (Making and Managing Your Own Money). I work with them alongside their other financial professionals (CPAs, Estate Planning Attorneys, etc.) to plan for their lifestyle today and provide the financial flexibility to shift gears so that they can have the lifestyle they want in their later years as well. It is an ongoing process. Life Insurance, along with the other insurances and investment accounts, can play an important role in these plans.
Starting young is best. But you can never start sooner than now to figure out the best plans for you.