There is a misconception that life insurance is something you do not have to think about until you get older, but there are numerous benefits to buying life insurance early in your working career.
You probably have insurance provided to you by your employer, but you may want to consider purchasing additional life insurance, especially if you have a family that is dependent upon you.
Even if your employer provides life insurance benefits, you cannot necessarily rely on this to cover your family’s needs in the event of claims. The majority of employer-provided life insurance plans cap the total benefit at $50,000. This is not a coincidence. The federal government imposes what is referred to as “imputed income” to individuals who have employer-paid life insurance benefits in excess of $50,000.
“Some employers offer a benefit equal to one or two times annual salary,” says Chuck Whitford Jr., CLU, ChFC, a consultant for JRG Advisors, the management company for ChamberChoice. “However, most financial planners recommend 10 times your annual salary.”
Another reason not to rely entirely on the life insurance provided by your employer is the fact that it goes away when you leave your job. While some plans offer the ability to convert the coverage, it is typically very expensive since no one can be declined.
Smart Business spoke with Whitford about life insurance and how you can ensure that you and your family are always adequately covered.
Is there anything wrong with purchasing life insurance through your employer?
Not at all. Approximately 62 percent of Americans purchase life insurance at work. Group life insurance is a great way to fill gaps in coverage at an affordable cost as a result of the ‘group’ volume. And, buying life insurance at work is convenient. Employees can pay premiums through payroll deduction, and, depending on the benefit design and amount of coverage elected, employees may not be subject to medical underwriting. Some plans allow employees to purchase coverage for their spouse and/or dependent children. Upon leaving their employer, there is typically an option to maintain coverage by paying premiums directly to the insurance company.
However, for many people, this is the only life insurance they own. And that’s the problem.
What other life insurance options are out there?
The choices you face when buying life insurance can be overwhelming. There are two types of life insurance. The first is term life insurance, which pays a benefit if you die within a specified period of time. This is the less expensive type of life insurance. The second type of life insurance is permanent life insurance. This benefit, in addition to paying out in the event of your death, generally builds cash value and offers the insured some flexibility.
Why don’t more people have life insurance?
Surprisingly, it is estimated that nearly one in three adults do not have any amount of life insurance. For those with life insurance, many are overly optimistic about the length of time a life insurance benefit payment to the beneficiary would last. In a recent survey, 54 percent said they thought a $250,000 lump sum benefit would last at least four years, with almost half of those predicting it would last 10 years or more.
The average amount of life insurance for the family ‘breadwinner’ is $235,600, according to Life Insurance and Market Research Association (LIMRA) International. If the entire lump sum payment is used to pay off larger debt such as a mortgage, credit cards or funeral expenses, little money is left to pay for everyday living expenses such as groceries, gas, utilities, clothing, etc., leaving the family exposed to financial hardship. Clearly, many individuals need significantly more life insurance than they have.
How much life insurance do I need?
You need to make an educated guess as to your family’s needs since it is impossible to know how much you are going to earn over your lifetime, what future economic conditions will be and, of course, when are you going to die. A basic approach is adding up your current liabilities (including mortgage, loans and other outstanding debts), then deciding how many years of income you want to replace. If you have children, you should factor in an estimation on the cost of their education.
The sum of these three numbers will give you an idea of the total death benefit you need. Some reduce this by the amount of the life insurance benefit their employer provides. If you do this, remember there is no guarantee that your current plan will never change or that, if you change jobs, your new employer will have a similar life insurance plan.
The most important piece of advice to consider when purchasing life insurance is to do your homework and ensure that the insurance you buy is the most suitable for your particular circumstances. An insurance professional who is not limited to a single life insurance company can be of assistance in providing the comparative information you need.