Life throws us curveballs all the time. Most of these curveballs we navigate easily, but some end in misfortune with a death. Typically, if satisfactory planning is not completed upfront, the bad luck may continue for months, years, or even decades in the form of lost income, medical bills, or final expenses. How does this happen?
Consider your family and how losing an income might change its standard of living. Do you have children? Look at your desired plans for your children and ask yourself what will go unfunded if you were to pass away tomorrow. What about your spouse? What plans will go unfulfilled due to your loss? Don’t forget about debt on homes, cars, businesses, and other key items.
As you can see, having enough life insurance is vital to a financial plan and risk management. (Click here to learn more about risk management.) People spend extended periods of time remaining underinsured for simple reasons like they don’t know enough about life insurance or they don’t want to go through the underwriting process.
Taking advantage of your employer-provided life insurance programs is a great way to easily provide proper coverage. However, it is not the best alternative for everyone.
What life insurance coverage may be accessible through Purdue University?
Universal Life is one form of life insurance. The coverage is considered permanent because the policy will remain in force as long as the premiums are paid. Additionally, the policy builds cash value on a tax-deferred basis while providing flexible premiums and benefits. Purdue provides access to a universal life policy with long-term care provisions through Trustmark. Due to the complex nature of this policy, a separate blog post will be completed at a later time. (1.)
Purdue also provides access to term life insurance as the second policy through Minnesota Life. As the name suggests, the policy has a finite lifespan. The university provides a basic employee term policy with the following characteristics (2):
– One and a half times annual salary not to exceed $500,000.
– The choice to limit employer-paid coverage to $50,000 for imputed income tax purposes.
– Extra coverage available of up to eight times annual salary, not to exceed $2,000,000. (May require proof of insurability.)
How much life insurance do I need?
Like with all financial planning, general rules of thumb work only in general, and general advice does not relate to individual circumstances. However, it is a good idea to start with generalities for comparison purposes.
The 10x factor.
Simply take your annual income and multiple it by ten. For example, a $100,000 salary requires coverage at $1,000,000. This approach assumes that income and future obligations will be enough with this figure when, in fact, you may need significantly more or less.
A thorough calculation will consider future spending by your spouse, educational needs of your children, health care expenses for aging parents, current debt, assets, liquidity of current assets, philanthropic wishes, and taxes.
Because of this complexity, it is a good idea to use a calculator or a professional to help you assess your life insurance needs. If the latter is used, make sure that the insurance agent puts your best interest first and clearly explains the policy. Ask things like, “Could you describe the downsides of this policy? May I repeat the policy terms in my own words?” Review the information for which the agent asks in assessing your needs. Did he or she inquire about each area listed above?
Remember, insurance is meant to protect you or your family from a low-probability and highly catastrophic event. (Click here for an understanding of Risk.) Insurance in its purist form is neither a savings vehicle nor a way to reduce taxes. In fact, insurance should be regarded as an expense to transfer risk.
Using your university policy is a great starting point, but comparing costs for more coverage is a good idea.
Cost Comparison of University Term
Low Load Life Insurance (3) was used as an outside proxy. The information below is meant only for illustrative purposes.
The chart below shows annual premiums for an additional $250,000 of coverage at the ages of 35, 45, and 55. The term limits for the nonunisex nontobacco group (individual policy) provide level term coverage up to age 65, while the unisex group will see rate increases in five-year increments. For example, people age 30 through 34 pay the same premium and a rate increase happens for the group starting at 35, then 40.
|Best Class||Standard Non-Smoker||Unisex Group (non-tobacco)|
|35: 30-yr Term||263||227||483||389||123|
|45: 20-yr Term||337||272||604||479||201|
|55: 10-yr Term||452||344||839||614||555|
Upon a first review, it appears that the group insurance is cheaper than buying an individual policy. However, seeing premium increases every five years does influence total premiums paid over time.
Let’s examine the results if we assume that $250,000 of life insurance is purchased for coverage through age 65 and look at the average premium per year to account for the unisex group rate increases.
|Average Annual Premiums for Coverage Through Age 65|
|Best Class||Standard Non-Smoker||Unisex Group(non-tobacco)|
|35: 30-yr Term||263||227||483||389||366|
|45: 20-yr Term||337||272||604||479||485.75|
|55: 10-yr Term||452||344||839||614||723|
Quickly, one may see a different story in the average policy premium paid, leaving one wondering about the best strategy or maybe starting one’s career with the unisex policy and later moving to an individual policy. However, one must be careful with the latter notion, higher ages and changing health conditions over time may result in higher premiums.
What are my next steps?
First, work with free online life insurance calculators to gain a better idea of the amount you need. Note the different calculators will not use the same assumptions, so you will end up with a range of coverage. However, this should place you in the general area you need.
Second, what is your current state of health? The tables mentioned a best class and standard non-smoker. Generally, the better your health, the lower your rate will be. Upon examining the state of your health, do you think you will be in the best class or nonstandard?
Three, start comparing your choices with premium comparisons. This stage may involve conversations with your human resources representative and insurance agent, as well as online research. Be sure that you do not buy policies that do not meet your needs.
If you have questions, please do not hesitate to contact me at email@example.com.
- “Universal Life Insurance.” – Benefits. Purdue University, 2015. Web. 08 May 2016. <http://www.purdue.edu/hr/Benefits/currentEmployees/employeeBenefits/voluntary/universalLife.html>.
- “Term Life Insurance.” – Benefits. Purdue University, 2015. Web. 08 May 2016. <http://www.purdue.edu/hr/Benefits/currentEmployees/lifeAndAccidentInsurance/term.html>.
- “Welcome to LLIS.” The Advisor’s Insurance Advisor. Low Load Insurance Services, Inc. Web. 08 May 2016. <https://llis.com/>.