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, 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 wishes 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 because of your loss? Don’t forget about debt on homes, cars, businesses, and other key items.
As you can see, having enough life insurance is important 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 employer-provided life insurance is a great way to easily provide proper coverage. However, it is not the best alternative for everyone.
Will I have access?
Not all employers provide access to a life insurance benefit. In fact, the Bureau of Labor Statistics news release from March 2016 notes that fewer people have access to a life insurance benefit (55% for private industry) than to medical or retirement benefits (1.) Generally, plans cannot discriminate in terms of who has access to the plan. The insurer commonly requires that 75 percent of eligible employees participate in contributory plans. Also, life insurance benefits may be different based on earnings or employment position. However, the employer will not be able to set benefits for specific employees to prevent discrimination (2.)
How much life insurance do I need?
As 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 multiply it by 10. For example, a $100,000 salary needs coverage of $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, the educational needs of your children, health care expenses for aging parents, your current debt, your assets, the liquidity of current assets, your philanthropic wishes, and taxes.
Because of this complexity, it is a good idea to use a calculator or a professional to assess your life insurance needs. If you use the latter, make sure the insurance agent puts your best interests first and clearly explains the policy. Ask, “Could you describe the downside 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 protects you or your family from a low-probability and catastrophic event. (Click here for an understanding of Risk.) Insurance in its purest 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 group 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 (4) was used as an outside proxy. The information below compares an individual policy with a group policy provided by Purdue University and is for illustrative purposes only (3.)
The chart below shows annual premiums for an added $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 occurs for the group starting at 35, then 40.
Upon an initial review, it appears that the group insurance is cheaper than buying an individual policy. However, premium increases every five years does influence the total premium 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 each year to account for the unisex group rate increases.
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, as 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 coverage you need. Note that the calculators will not use the same assumptions, so you will end up with a range of coverages. 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 nonsmoker; the better your health, the lower your rate will be. Upon examining the state of your health, do you think you would be in the best class or the nonstandard class?
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 you don’t buy policies that don’t meet your needs.
Still feeling overwhelmed? Give me a call at 317-805-0840 or email me at firstname.lastname@example.org to discuss your specific situation.
- US Department of Labor. New Release Bureau of Labor Statistics. N.p.: US Department of <Labor, n.d. Print. https://www.bls.gov/news.release/archives/empsit_04012016.pdf>.
- GROUP TERM LIFE INSURANCE. N.p., n.d. Web. 19 June 2017. <https://www.wallstreetinstructors.com/ce/continuing_education/nonqualified/id83.htm>.
- “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/>.