Is your employer provided life insurance coverage your only source of life insurance? If your answer is YES, you have to ask yourself if your employer provided coverage is enough to take care of your family’s financial needs should you die prematurely. Most employees could save up to 70 – 80% on annual premiums by buying their own individual coverage outside of their employer-provided term life insurance policy.
Take for example a 45-year old married employee, stay at home spouse, two kids (ages 10 and 8), a home, and an annual salary of $90,000. This employee has an employer provided life insurance coverage three times their annual salary for a total of $270,000 coverage. This employee also has a 20-year mortgage with a balance of $450,000; credit card balance of $10,000; combined monthly payments of $850 ($10,200 annual). A quick glance of these numbers shows that this employee does not have enough coverage .
Why is buying your own individual life insurance coverage a better option than your employer provided coverage? First, having your own private individual life insurance will allow you to buy more coverage than that provided by your employer. Most companies allow employees to purchase coverage up to six times their annual salary however, for many employees this coverage is still not enough. Another advantage to owning your own individual policy is that you don’t have to worry about not having insurance should you lose your job, quit your job, or in the event the company decides to eliminate life insurance from its list of “give-me’s” which many companies have begun doing as a way to reduce cost.
Unlike your employer provided group term life insurance policy which doesn’t require underwriting, individual insurance policies require medical underwriting, unless you decided to go with a no-med exam which typically cost more and very few companies offer such these days. I have written many policies for clients who didn’t know they had undetected medical issues such as hypertension, coronary (heart) condition, high blood pressure (HbP), etc., until some of these conditions were discovered during the medical examination. Don’t let the possibility of a simple medical exam scare you. It’s worth it!
Below are some reasons to purchase your own policy.
Issue 1: Your employer may not offer enough life insurance.
While employer-provided group term life insurance is often low-cost or free, and it allow you to buy additional coverage at low rates, your policy’s death benefit (coverage amount) still may not be high enough to cover your overall financial needs. If your premature death would a financial burden to your survivors including spouse, children, parents (if they co-signed on a student loan, you are a candidate for life insurance) you probably need coverage worth five to eight times your annual salary. Some experts recommend getting coverage worth 10 to 12 times your annual salary however, I typically determine my clients’ insurance needs after completing a financial needs analysis.
Problem 2: Coverage gets tricky if your health declines.
Another problem arises if you’re leaving your job because of a health problem. “If you relied solely or heavily upon group insurance, and then suffer a medical condition that forces you to leave your job, you may be losing your life insurance coverage just when your family is going to need it the most,” says Jim Saulnier, a CFP® with Jim Saulnier & Associates in Fort Collins, Colo. “At that point it would be too late to purchase your own policy at an affordable rate, if at all, depending on the medical condition,” he says.
Even if your health problems aren’t significant enough to stop you from working, they might limit your employment options if you only have life insurance through work. “You could end up handcuffed to your job to keep the life insurance if you experienced a serious enough health issue,” says David Rae, a CFP® and vice president of client services for Trilogy Financial Services in Los Angeles.
Also, you don’t control who provides this insurance, and your company could choose a lower-rated insurance company to save money or eliminate the service altogether. That could mean the insurance you paid for won’t be there to cover you when you need it. Be sure to check the A.M. Best insurance rating of the life insurance company behind the benefit your employer offers. This rating will tell you whether the company is financially stable enough to pay your policy if the worst happens. Finally, another possibility is that your employer could stop offering life insurance as a benefit to save the company money, leaving you without coverage.
Problem 3: Your plan doesn’t provide enough coverage for your spouse.
While your employer’s benefits package probably provides health insurance for your spouse, it won’t always provide life insurance for your spouse. If it does, the coverage could be minimal — $100,000 is a common amount — and that sum doesn’t go far when you lose your husband or wife unexpectedly.
Couples often assume that the family will only suffer economic hardship if the primary breadwinner dies, says Jim Saulnier, and as a result, many workers fail to adequately insure their spouses. But non-working or lower-earning spouses can see their incomes impacted by their partner’s death. “I often say rhetorically to a client, if your wife dies on Saturday are you going back to work Monday morning? Do you have ample PTO [paid time off] on the books to cover an extended leave?” he says.
What’s more, says Barber, “When one parent is absent, the other must take up the slack with day care or chauffeuring. Hours are cut back. There is never time to properly grieve and, as survivors are often depressed, productivity often falls.”
While there’s no reason not to take advantage of any free or inexpensive insurance your employer offers, it shouldn’t be your only source of life insurance, nor should most people rely heavily on the supplemental life insurance they can get through work. The solution to each of the problems described above is to purchase some or all of your life insurance directly through an individual term policy. You might need to purchase as much as 80% of your life insurance on your own to have enough and to make sure you’re covered at all time and under all circumstances.
If you don’t qualify medically for life insurance, you can purchase an individual term policy called “guaranteed issue,” which doesn’t require medical underwriting. These policies are typically much smaller and much more expensive than what you’d get under a term policy that you qualified for medically, but as long as you can afford the premiums (and life insurance premiums should be a priority in your budget), having this coverage is better than nothing. And if your health improves (for example, you quit smoking or overcome hypertension), you might be able to qualify for a medically underwritten individual policy and drop the more expensive policy that doesn’t require medical underwriting.
Barber believes that, on the whole, the most affordable solution is to buy the most insurance you can afford at the youngest age, since, as you age, the chance of acquiring an illness goes up, and with illness comes more expensive premiums, if you can qualify at all.
The Bottom Line
You need enough life insurance to cover all your debts and support your dependents. “Enough” includes paying off your credit cards, car loans and mortgage, paying for your children’s education, and making sure your spouse will have the financial means to take care of him or herself and your children. In a time of grief, the last thing you want is to leave your loved ones with another major life upheaval such as having to change jobs or schools because of financial strain, so take a close look at whether the life insurance you’re getting through work is the best way to provide for your loved ones.
Contact me for questions.