Why employer-provided life insurance can backfire
- More workers are now covered by group life insurance than private policies.
- Employer-provided coverage is typically not nearly enough to protect most households.
Employer provided benefits, though well-intentioned, can nonetheless be a minefield for misinterpretation.
Take life insurance, for example. It's a popular employer-provided perk that is lulling workers into a false sense of security.
A new survey from LIMRA, the research engine for the life insurance industry, says 108 million Americans have life insurance through a group plan while 102 million have coverage through an individual plan they purchased.
That's the first time since LIMRA began tracking the issue in 1960 that group coverage is more popular.
In most instances, workers merely accept the free life insurance benefit without thinking it through. Nothing wrong with free, but free isn't necessarily enough.
Anita Potter, a workplace benefits specialist at LIMRA, says smaller firms tend to offer a flat dollar amount, maybe $25,000 to $50,000. At firms with at least 100 employees the norm is typically a multiple of salary; one times salary is common, though sometimes generous employers offer up a two times or three times free life insurance benefit.
"If you are just out of college and don't have debts or dependents that might be enough," Potter said. "A lot of times it's not enough."
Figuring out how much is enough is not very hard to spitball.
"At a minimum, the basic rule is that you want a policy that can pay off your debts, and if you've got young kids you might want to provide for their education," said Jeff Rose, a certified financial planner and founder of Alliance Wealth Management in Carbondale, Illinois.
If you've got other people dependent on your income, such as a spouse, parents or siblings, you likely will want a policy that also provides supplemental income.
The average mortgage balance is around $110,000. Private student loans, which aren't forgiven when the borrower dies, can be another chunk of change your heirs will have to deal with. And if you've got rugrats, the cost of getting them through high school and potentially college is going to be another multiple of your salary.
That's why a basic starting point for protecting a household is typically in the vicinity of 10 times salary. Even if your employer offers the ability to purchase additional coverage through the group plan (and only a minority of employees choose that) that often has a limit of a few times your salary.
Coming to terms with your mortality
Chances are you need to venture into the individual market and buy a term life insurance policy. If you're in good health and on the younger end of the age curve, the individual market will likely be less expensive than the premium for buying more coverage through the group plan at work.
A term policy pays out a death benefit to your beneficiaries if you die during the policy term, which can be 10, 20 or 30 years. That's likely all you need, given that your big ticket expenses have a finite shelf life.
For example, the mortgage will be paid off within 30 years, and the kids will be young, independent adults (hopefully in less than 30 years). And if you outlive your policy, chances are in the intervening 10, 20 or 30 years you've managed to pay off the mortgage and build up assets, such as retirement accounts and other savings.
Term life insurance is much less expensive than that other breed of coverage: permanent life insurance, which comes in a variety of flavors such as whole life and universal life.
As its name implies, there is no end date on a permanent policy. The added cost is in part to pay for an investment component that is more expensive than if you invested in low-cost index funds and exchange-traded funds on your own. The higher premiums on permanent policies can make them a favorite of insurance agents working on commission.
Rose said he recently worked with a 28-year-old new parent who was being sold a whole life policy with a $200,000 death benefit that was going to cost around $250 a month. Rose instead suggested a 25-year term life insurance policy with a $500,000 death benefit. The monthly premium: $50. You can get personalized estimates at at term4sale.com.
"Most people are surprised at how inexpensive term life insurance is," said Rose.
(Tip: Even if you are a workout maniac, don't assume your health is "Preferred Plus/Exceptional. Just 10 percent or so of applicants fall into this tier that offers the lowest premiums.)
When you purchase your own policy, you don't have to worry about the fact that when you leave a job, your free group life insurance coverage is cut off. If your next job doesn't offer the benefit and your health status makes it harder for you to qualify for an individual policy, you've got yourself into a financial pickle.
"Buy your own coverage and you can change your job 27 times in the next 30 years and not have to worry about life insurance," Rose said.
And it's easy to avoid a face-to-face with potentially hard-sell agents. Websites such as Accuquote, PolicyGenius and Quotacy deliver online term life insurance quotes — they shop a variety of insurers — and you can apply online.
Depending on the amount of insurance you're applying for, the insurer may send a medical technician for an in-home/at work mini-physical, on the insurer's dime. That's a small hassle for being able to tick off a major financial to-do, with a premium that likely will run you less than the monthly tab for your cell service.
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