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 who would be financially devastated if something were to happen to you, then group term life insurance is a benefit that you should seriously consider.
What Is Life Insurance?
I think that most people have a decent understanding of what life insurance is, but for those who don’t completely understand it 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.
(You’ll be able to find more information about different types of life insurance policies that may be offered to you through your employee benefits in a later post in this series.)
Do I Need Life Insurance?
Last year I listened to a podcast where I 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. Life insurance is 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.
Life Insurance Helps Protect Those Who Depend On Your Income
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 life insurance 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.
Life Insurance Isn’t Only For The Higher Income Earner
What if your spouse works and is the higher earner? Life insurance may still be important for you to have in place as the lower income earner. If you were gone, the loss of your income would mean that there would likely be things that your family wouldn’t be able to afford such as your mortgage, childcare expenses, or college education for your children. It’s important to take into consideration that the family is counting on your income for many years to come, not just for the immediate future.
Something else that people often don’t consider is having life insurance on a stay-at-home spouse. Although a stay-at-home spouse may not directly provide income to support the family, the likely do things that benefit the household economically such as take care of children that eliminates day care costs.
Not Everyone Needs Life Insurance
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 I Need?
The typical rule of thumb that I see thrown around is that the death benefit of your life insurance policy should be 10-15 times your income. However, this is a rule of thumb and should be taken with a grain of salt.
Life Insurance Needs Analysis
A more accurate way of determining how much life insurance you need is by completing a needs analysis where you determine how much money 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.
Determining How Much Life Insurance You Need Using A Rule Of Thumb
Completing a thorough analysis like this can seem overwhelming to many. In this case, if you do not plan on finding a professional to help you, using a rule of thumb is better than not having needed coverage in place.
An example that I recently saw showed how using the rule of thumb of multiplying your income by 15 can yield a result similar to what a needs analysis may show. Using conservative assumptions, buying a term life insurance policy that provides a death benefit of 15 times your income could reproduce 75% of your income.
- You earn $100,000
- $100,000 x 15 = $1,500,000 death benefit
- $1,500,000 earning 5% annually = $75,000 of income
The term (how long you will have the policy in place) of your life insurance policy should be determined based on when you will become self-insured, or when it would no longer matter if your income was lost. However, group term life insurance typically expires when you leave the employer that you have purchased that coverage through. Supplementing group term life insurance coverage with private life insurance can help to fill in the gaps.
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 basic coverage in place if your employer provides it, but you’ll want to make sure that your beneficiaries are listed on the policy. The amount of basic life insurance coverage provided often isn’t enough to cover the needs of most people.
No Medical Underwriting
“Supplemental” group term life insurance coverage is additional life insurance that you can purchase when you make your employee benefits elections during open enrollment to increase your death benefit beyond the basic coverage that your employer provides. 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 level of death benefit in group term life policies that requires a health screening to obtain the coverage.
Subsidized Premiums
The cost (premiums) of supplemental group term life insurance is subsidized by the employer, 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.
Compare Group Term Life To Private Life Insurance
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 the premiums are 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. Having a life insurance policy in place that won’t go away if you leave your employer can be very beneficial to many people.
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 have health problems, then electing to pick up the supplemental term life offered through your employer very well could be your cheapest option since you may not be subject to medical underwriting.
Private Policies Can Provide Level Premiums
You can get a 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 now and know exactly how much you’ll pay for the coverage and for exactly how long. Private term life insurance policies typically provide coverage for 30 years or less and will not lapse once you leave your employer like life insurance through your employee benefits does. This kind of life insurance is yours and remains in place until the term is up or you decide to quit paying the premiums.
On the other hand, your group term life insurance premiums are most likely going to continue to increase each year. The premiums for group term life policies usually increase annually or in age brackets of 5 years.
Higher Death Benefit With Private Life Insurance
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.
Your Group Term Life May Go Away If You Leave Your Job
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 2020
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 2020 employee benefits open enrollment season.
Find the previous posts in this series here:
- Part 1: Health Insurance
- Part 2: Disability Insurance
Please note that this article has been re-posted and updated from the article that was published October 1, 2019 titled Guide to Employee Benefits Open Enrollment 2019 Part 3: Group Term Life Insurance.
