Group term life insurance is a very common employee benefit that many people take advantage of. However, not many people think beyond the scope of the coverage offered through their employee benefits to consider why they need the coverage, how long they’ll need it, and if the maximum amount they can get is enough. If there are people who depend on your income and would be financially devastated if something were to happen to you, then this is a benefit that you should be taking more seriously.
What Is Life Insurance?
I think that most people have a decent understanding of what life insurance is, but for those who don’t the simplest way that I know how to explain life insurance is that it’s a contract that you enter into with an insurance company where you promise to pay premiums (the cost of the policy) in exchange for their promise to pay your beneficiary a cash lump sum death benefit if you die.
There are many different types of life insurance policies, but we’re going to focus on those that employers most often provide through their employee benefits packages, which is group term life insurance.
Who Needs Life Insurance?
The other day I was listening to a podcast and heard life insurance described as “love insurance”. As tacky as it sounds, that’s really what it is. Life insurance isn’t going to make your life better (and anyone that tells you otherwise is probably making a nice commission from selling you a policy); it’s there to protect your loved ones. It’s another form of insurance that you hope you never have to use but that can provide a huge blessing to others if something happens to you.
If you were to pass away today, what would happen to those who depend on your income? Would they be able to get by and pay all of their bills? The answer is likely no, which is why life insurance is important. You have it in place to help replace your income in the case of an untimely death until you become financially independent and no longer need the coverage to ensure that your dependents will be able to maintain their lifestyles.
What if your spouse works and is the higher earner? Life insurance may still be important. If you were gone there would likely be things that they wouldn’t be able to afford such as your mortgage, childcare expenses, or college education for your children. It’s also important to take into consideration that the family is counting on your income for many years to come, not just the immediate future.
Not everyone needs life insurance. The goal is to become self-insured at some point so that you no longer need life insurance in place to protect your loved ones. This would mean that you have enough in income producing assets and other investments that those who depend on you could continue their lives financially once you’re gone. There may be some people who don’t have a life insurance need based on their circumstances. If there’s no one who depends on your income and there isn’t anyone whose name is on any of the debt that you have, then it’s likely that you don’t need life insurance.
How Much Life Insurance Do You Need?
The typical rule of thumb that I see thrown around is that the death benefit of your life insurance policy should be 10X your income. However, this is a rule of thumb and should be taken with a grain of salt.
A more accurate way of determining how much life insurance you need is by completing a needs analysis where you determine how much your dependents would require to sustain the household including daily needs, debt payments, final expenses for you, college education, etc. It’s important to take all of these factors into consideration to ensure that you’re properly protecting your loved ones.
Why Should I Pay For Employer-Provided Life Insurance?
First, you should know that many employers offer a small amount of life insurance to their employees for free, typically called “basic” coverage. Usually, I see this as a $50,000 death benefit or 1X the employee’s salary. You don’t have to do anything to get this coverage in place if your employer provides it, but you’ll want to make sure that your beneficiaries are listed on the policy. This amount of coverage isn’t enough to cover the needs of most people.
“Supplemental” group term life insurance coverage is the amount that you can elect to pay for yourself when you make your employee benefits elections during open enrollment. The biggest benefit that I see to picking up supplemental group term life insurance is that it’s easy and you can often get a substantial amount without having to go through medical underwriting, unlike when obtaining a private life insurance policy where you’re subject to health screenings. However, there is often a certain death benefit level in group term life policies that requires a health screening to obtain the coverage.
The cost (premiums) of supplemental group term life insurance is subsidized by employers, which means that the employee isn’t responsible for paying all of the premiums for the coverage. However, that doesn’t necessarily mean that it’s cheaper than what you could find on the open market.
If you’re looking into picking up the life insurance coverage offered through your employee benefits, then you can compare quotes online or through an independent insurance agent and see if they’re close to where they should be or if you should consider a different option.
If you have a need for life insurance, then having group term life in place is better than not having any coverage in place at all. It may be smart to pick up your group coverage to make sure that your dependents are protected over the next year while you determine if a private policy is more appropriate for you.
Why Employer-Provided Life Insurance Might Not Be The Best Option
While group term life insurance offered through your employee benefits might be the easiest option to get since all you have to do is click a few buttons during open enrollment, it may not be the best option. Oftentimes, if you’re healthy, you can find cheaper coverage through an independent insurance agent who can get quotes for you from tens or hundreds of different insurance providers. However, if you’re unhealthy, then electing to pick up the supplemental term life offered through your employer very well could be your cheapest option since you won’t be subject to underwriting.
You can get private level term life insurance where the premium remains the same for the length of the policy. This is a great benefit because you’re able to lock in the premium and know exactly how much you’ll pay for the coverage for exactly how long. These policies are typically 30 years or less. On the other hand, your premiums are going to continue to increase with your group term life insurance. The premiums for these policies usually increase in age brackets of 5 years but can increase annually as well.
The amount of coverage that you can get through work may not be enough to cover your need. It’s often better to use group term life insurance coverage as a form of supplemental life insurance to a private policy since the amount of death benefit you can get through your employee benefits is limited.
You’ll lose your life insurance coverage that you have through your employee benefits once you change jobs, unless it’s portable. If the policy is portable, then it may end up being more expensive than a private policy since you’ll have to begin paying the portion of the premiums that your employer was subsidizing before. Losing this death benefit when you change jobs could cause serious risk to the well being of your dependents if something were to happen to you, which is why a private policy could make sense as your primary source of life insurance.
Private term life insurance provides a death benefit for a certain number of years, so you know it will always be with you no matter what job you have or how many times you change employers. Some people have a preconceived notion that life insurance is expensive, but it can actually be extremely affordable. Check out some average life insurance premium rates here.
Guide to Employee Benefits Open Enrollment 2019
If there are people who depend on your income and would be financially devastated if something were to happen to you prematurely, then taking a closer look into the life insurance offered through your employee benefits is something you may want to consider.
This is part 3 of a series where I’m providing general education on many of the employee benefits elections that you’ll be faced with during the 2019 employee benefits open enrollment season. Find the previous posts here:
