As part of your employee benefits package, your employer may
provide some group term life insurance. While that’s a nice perk,
especially if you have no other life insurance in place, it’s important
to consider whether it’s sufficient to meet your financial needs.
What’s more, relying entirely on your employer’s insurance plan to
cover you can pose other problems.
Key Takeaways
Many employers offer a certain amount of group term life insurance
as part of their employee benefits package.
If you have this benefit, then your employer may pay for some or all
of the premium costs.
You may also be able to buy additional coverage at your own expense.
However, getting all of your life insurance where you work can put
your family at risk if something happens to you.
Problem 1: Your Employer May Not Offer Enough Life Insurance
While basic employer-provided life insurance is usually low-cost or free,
and you may be able to buy additional coverage at low rates, your
policy’s face value still may not be high enough. If you have dependents
who rely on your income, then you probably need coverage worth at
least six times your annual salary. Some experts even recommend
getting coverage worth 10 to 12 times your salary.
“Most people are able to buy an additional four to six times their salary
in supplemental coverage over and above what’s provided by their employer,”
says Brian Frederick, a certified financial planner (CFP) with Stillwater
Financial Partners in Scottsdale, Ariz. “While this amount is sufficient
for some people, it isn’t enough for employees that have non-working
spouses, a sizable mortgage, large families, or special-needs dependents.”
What’s more, simply multiplying your salary may not be enough to replace
your actual income. “Death benefits that replace salary do not take into
account bonuses, commissions, second incomes, and the value of
additional benefits such as medical insurance and retirement contributions,”
notes Mitchell Barber, a financial services professional at the Center for
Wealth Preservation, a Syosset, N.Y.-based agency of MassMutual
Financial Group.
On the other hand, your employer’s group life insurance might be sufficient
if you’re single or if you have a spouse who isn’t dependent on your income
to cover household expenses and the two of you don’t have children. If
you’re in that situation, then you may not need life insurance at all unless
you want to cover your funeral expenses or have debts, such as co-signed
student loans, that you don’t want to leave behind for someone else.
Problem 2: You Can Lose Your Coverage If Your Job Situation Changes
As with health insurance, you don’t want gaps in your life insurance coverage
because you never know when you might need it. If you change
jobs, are laid off, or are reduced to part-time status, then you could lose your
employer-provided life insurance.
Lack of portability can be a problem if you aren’t going directly to another job
with similar coverage and aren’t healthy enough to qualify for an individual
policy. Some policies do allow you to convert your group policy to an
individual one, but it likely will become much more expensive. And if you’re
losing your coverage because you were laid off, then the premiums might
be unaffordable.
“Since the products that are available for conversion from an employer-
provided plan are typically limited to just one insurance carrier’s offerings,
a client can generally find a more cost-efficient insurance policy outside of
the employer’s plan,” says Thaddeus J. Dziuba III, a life insurance specialist
for PRW Wealth Management in Quincy, Mass.
“This presupposes that the client can obtain favorable underwriting, however,”
he adds. “As a rule of thumb, if a client can no longer get medically
underwritten for new insurance coverage but still has a financial need for the
death benefit provided by his or her company’s plan, then we often advise
conversion regardless of price, since it will be unlikely that they can obtain
coverage elsewhere.”
Even if you don’t leave your job, there’s also the risk that your employer could
stop offering life insurance as a benefit to save the company money, leaving
you without coverage.
Problem 3: Coverage Gets Tricky If Your Health Declines
Another problem arises if you’re leaving your job because of a health problem.
“If you rely solely or heavily upon group insurance, and then suffer a medical
condition that forces you to leave your job, you may be losing your life
insurance coverage just when your family is going to need it the most,” says
Jim Saulnier, a CFP with Jim Saulnier & Associates in Fort Collins, Colo. At
that point, it may be too late to purchase your own policy at an affordable rate,
if you can get one at all, he says.
Even if your health problems aren’t significant enough to stop you from
working, they might limit your employment options if you only have life
insurance through work. “You could end up handcuffed to your job to keep
the life insurance if you experienced a serious-enough health issue,” says
David Rae, a CFP and vice president of client services for Trilogy Financial
Services in Los Angeles.
Problem 4: Your Plan Doesn’t Provide Enough Coverage for Your
Spouse
While your employer’s benefits package probably offers health insurance for
your spouse, it won’t always provide life insurance for them. If it does, then
the coverage may be minimal… $100,000 is a common amount, and that
doesn’t go far when you lose your husband or wife unexpectedly.
Couples often assume that the family will only suffer economic hardship if
the primary breadwinner dies, says Saulnier, and as a result, many workers
fail to adequately insure their spouses. But the death of a nonworking or
lower-earning spouse can put great demands on the family’s income. “I often
say rhetorically to a client, if your [partner] dies on Saturday, are you going
ack to work Monday morning? Do you have ample PTO [paid time off] on the
books to cover an extended leave?” Saulnier adds.
What’s more, says Barber, “When one parent is absent, the other must take
up the slack with daycare or chauffeuring. Hours are cut back. There is never
time to properly grieve and, as survivors are often depressed, productivity
often falls.”
If your current employer-sponsored coverage doesn’t offer a sufficient death
benefit for your spouse, then you may need to purchase a separate policy for
them. But if they’re also employed, then they can check first to see what kind
of life insurance benefits are offered by their workplace.
Problem 5: Employer-Provided Life Insurance May Not Be Your
Cheapest Option
Even if you can get all the life insurance you need for both yourself and your
spouse through your employers, it’s a good idea to shop around to see if your
employer’s insurance really offers the best value for the money. The younger
and healthier you are, the more likely you will be to find a better rate
elsewhere. Also, unlike the guaranteed level-premium term life insurance that
you can purchase individually, which costs you the same amount every year
for as long as you have the policy, the coverage provided by your employer
tends to get more expensive as you age.
“Employer coverage starts out being very cheap prior to age 35 and then
rapidly increases in price,” says Frederick. “Most policies increase every five
years and become incredibly expensive once the employee turns 50. If you
are healthy and a nonsmoker, buying a stand-alone policy might be cheaper
than taking coverage through your employer.”
“Employees who are too unhealthy to qualify for life insurance on their own
tend to overload the group insurance because there is no underwriting, and
life insurance companies make up for it by charging higher premiums,”
Saulnier explains. As a result, the healthy people in group policies may pay
more than they would if they purchased private policies.
The Solution: Supplement Employer-Sponsored Life Insurance With
a Policy of Your Own
While there’s no reason not to take advantage of any free or inexpensive life
insurance offered by your employer, it probably shouldn’t be your only
insurance. Nor should most people rely entirely on the additional life insurance
that they can buy through work.
The solution to each of the problems described above is to purchase some of
your life insurance directly in the form of an individual term life policy. Term life
insurance is designed to cover you for a set period of time…such as 10, 20,
or 30 years… and is generally much more affordable than permanent life
insurance.
You might need to purchase as much as 80% of your life insurance on your
own to have enough and to make sure that you’re covered at all times and
under all circumstances.
Barber believes that, on the whole, the most affordable solution is to buy the
most insurance you can afford at the youngest age since, as you get older,
the chance of acquiring an illness goes up…and with illness comes more
expensive premiums, if you can qualify for a policy at all.
How Much Supplemental Life Insurance Do I Need?
As mentioned above, there are a number of rules of thumb for how much
life insurance you need in total, such as multiplying your current salary by
six, eight, 10, or more. While those guidelines can be better than nothing,
they also may be way off the mark, depending on your circumstances.
If you’d like to come up with a more precise, individualized estimate, then
consider first how much annual income your dependents rely on from you
and how many years they are likely to need it. For example, if you have very
young children, then you will need to replace more years of income than if
your kids are teenagers or older.
So, for instance, if your family would need $100,000 a year for 10 years to
cover their living expenses if you were to die tomorrow, then ideally, you
should have at least $1 million in life insurance.
Also, consider any large expenditures beyond their everyday needs that
your survivors are likely to face. For example, if you expect that your kids
will be going to college one day, then figure those costs into the equation, too.
If you have other assets that your family will inherit, such as investments or
money in retirement accounts, then you may need less life insurance than
otherwise. But, if you can afford to, it’s better to err on the high side when
estimating your needs, in part because inflation could erode the value of your
policy over time.
- Amy Fontinelle
Updated September 26, 2021
Hayden Childs
Alabama Licensed Agent
(205) 269-1382
https://www.helloplum.com/agent/childs-806
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