Your Financial Pharmacist mail bag
Your Financial Pharmacist By Timothy Ulbrich, PharmD
It’s time to open up the mailbag and answer pressing financial questions from today’s New Practitioners.
Q: Is buying whole life insurance (with a cash value) worth it? Or am I better off purchasing term life insurance? Premiums are about $285/month, which is relatively a lot of money when you stack it against other expenses (rent, loans, credit card debt, car payment, etc.).—Angela Olenik, Falls Church, VA
More often than not, for New Practitioners with debt (whether that be student loans, credit cards, and/or auto loans), term life insurance with a lower monthly premium is a better option than buying expensive whole life insurance (with a cash value). There are three main concerns I have with whole life insurance for recent pharmacy school graduates.
1. It is very expensive relative to term life insurance. In your question, you mentioned a premium of $285/month. For a younger, new pharmacy graduate that is in good health, it is reasonable to get a $1 million term life insurance policy for approximately $30 to $50 per month. I currently have a $1 million, 20-year term life insurance policy that costs $38/month. Essentially, that means if I die in the next 20 years, my wife and kids will receive $1 million tax-free. While I’m not gaining any money on that policy (through investments) and will "lose" those premiums paid if I never die in the next 20 years (which would be the goal!), it is a good investment to know that my family is taken care of in the event of my death.
2. Many whole life insurance policies are laden with fees and don’t have great track records of performance on the investment portion of the policy compared to the general performance of the stock market.
3. Paying this higher premium for whole life insurance, in comparison to a much cheaper term life insurance policy, gets in the way of being able to make progress on achieving other financial goals such as debt repayment, building an emergency fund, saving for a down payment on a home, saving for retirement, and so on. More often than not, you would be better off taking the lower premium associated with a term life insurance policy and using the extra cash available (from not paying for whole life insurance) to pay off debt or save for retirement using a 401(k) or Roth IRA.
There is one very important piece of information to keep in mind here as you are evaluating insurance policies. Insurance agents selling life insurance are not obligated to recommend a product that is the best fit for your personal situation. While the product being sold to you may be appropriate (although the word "appropriate" here is very subjective), it may not be the best option for your personal situation. There are a lot of commissions tied up into the sale of insurance products, which makes it hard for you as the consumer to truly know what is or is not in your best interest.
Q: I am about to get married and would like to buy a house in the next few months, instead of continuing to rent an apartment. Financially, I am wondering how much money I should set aside for a down payment on a house and fees associated with closing in on a home. Additionally, I would be curious to know how to go about deciding on a home mortgage as it relates to my income so that I do not wind up paying more per month than I actually should, so that I have enough for additional expenses.—Frank Fanizza, Overland Park, KS
This question is great timing as my wife, Jess, and I are currently looking to move and are in the weeds on trying to figure out what is the wisest way to make this decision. Based on personal experience of making some good and bad decisions when it comes to buying a home, there are six recommendations I have to consider for pharmacist homebuyers.
1. Ideally, you want to purchase a home when you are clear of debt. While this will require a tremendous amount of patience, it will likely motivate you to pay off your debt faster and will allow you to be in a home where you aren’t overwhelmed with the feeling of living paycheck to paycheck trying to balance paying off debt, saving for retirement, and so on.
2. Before moving into a home, have an emergency fund in place of 3 to 6 months of expenses. This will give you the peace of mind to know that you can take on additional expenses (e.g., home repairs) once you are in the home without having to go into debt.
3. Put 20% down on a home regardless of what the bank offers you in a loan package and/or tells you that you can afford. Putting 20% down a home, even with historically low interest rates, accomplishes two main things: not having to pay private mortgage insurance (PMI); and having instant equity in the home so that if the housing market tanks (circa 2008), you are not underwater on your home. In addition, in the event that you have to unexpectedly move, having 20% down gives you the equity to cover the real estate fees and closing costs associated with making that move.
4. Get a 15-year fixed mortgage. Compared to a 30-year mortgage, the saving on interest will be significant when using a 15-year mortgage. However, that is not the main reason I am making this recommendation. When you are looking at homes with a 15-year mortgage monthly payment in mind, it scales back your expectations and forces you into selecting a more affordable home that will allow you to achieve other financial goals.
5. Within the confines of a 15-year fixed mortgage, have a monthly payment (with taxes and insurance) that is no more than 25% of your take home pay. Less than 25%, of course, is better so that you don’t have the feeling of being “house poor.” While a pharmacist makes a great income (median of $121,500 in 2015), it is easy to see how that income can erode after taxes, student loan (and other debt) payments, and a nice home.
6. Be ready to pay closing costs and other fees associated with buying a home so that you don’t have to dip into your emergency fund, delay debt repayments and/or roll these expenses into your new mortgage. As the buyer, you will not be responsible for the realtor fees (typically 5% to 6% of the value of the home that is selling), but you will have to consider closing costs and other money due at signing such as prepaid escrow. While some of these fees are fixed based on the state and/or county you are buying the home in, others associated with the closing process are negotiable and should be shopped around. Many real estate agents will tie you into lenders and title agencies that they work with, but you should not blindly accept this as the only option available. Call around to different lenders and title agencies to get a quote on the various fees so you can compare one to another.
Back in 2009, my wife and I made the mistake of buying a home with only 3% down. After completing residency training in 2009 and starting my first job in Northeast Ohio (go Cavs!), we rented for a year and decided to buy a house the following year. We got the itch to buy a home and the offering of the first-time homebuyer tax credit exacerbated that itch. As a result, we only put 3% down to purchase our first home. While the monthly payment for our mortgage was well within our means, we could have waited one more year and banked enough money to put at least 20% down. We would have been much better off had we followed all six points noted above.
Best of luck!
These are excellent questions. Keep them coming and maybe I will answer yours in the next issue of Transitions. Send your financial queries to firstname.lastname@example.org, and write "Your Financial Pharmacist" in the subject line. Till next time, and remember, when it comes to a secure financial future, you can do it!