One of the perks of employment used to be that your employer would provide you with 1x or 2x your salary in life insurance. Today, many employers trim expenses by reducing the amount of life insurance given as a benefit. Employees are instead offered the opportunity to purchase additional insurance through the company’s group life insurance program. But is it a good deal?
Are we talking term or whole life insurance?
Term life insurance is a straightforward contract: “If you die during the period that the contact is in effect, your designated beneficiary will be paid the death benefit”. Whole life insurance is a completely different ball of wax. Whole life insurance is an investment vehicle to help the rich avoid estate tax. (Yes, really).
So, we’re talking term.
A term policy has level payments, meaning that the premium (what you pay each month) is predetermined and never rises for the term of the policy. In addition, most term policies can be extended (converted), albeit at a much higher premium. This might make sense if you are stricken with terminal cancer in the 19th year of your 20-year term policy. With cancer, you would not pass a medical exam for a new life insurance policy, but you might choose to convert your existing term policy.
Who needs life insurance?
Do I need life insurance? Easy answer: No. You don’t need life insurance — it’s the people you leave behind that do. The purpose of life insurance is to help your dependents cope financially should you die prematurely.
If you’re single and have no children, who would be affected by your death? Unless you’re the primary support for a disabled sibling or a parent, then you probably don’t need life insurance.
If you’re married, your spouse works full time, and you have no children, you still may not need life insurance. If you and your spouse agree that you could each maintain your standard of living without the other’s financial support, then you probably do not need life insurance.
If you have a child (or children), then you need to plan how these dependents will be financially supported. You might plan to support a child until able to provide for him/herself, perhaps at age 18, 21, or 25.
If you have a special needs child who may need support for his/her entire life, then you should strongly consider life insurance, and you should see a specialist to discuss your particular situation.
How much life insurance do I need?
There are several ways of computing your life insurance need:
You can simply estimate your need at 1x, 2x or 5x your current salary.
You might decide to provide a lump sum to, for example, pay off the mortgage.
If you have a stay-at-home-spouse, you might instead estimate the total need by multiplying your total household expenses (minus yours) by the number of years until your youngest child can fend for him/herself. You could factor in inflation, too, if you want to get fancy. Or you might decide that your spouse would go back to work, reducing the need for life insurance.
How much do I need to buy?
Read the fine print of your employment agreement and understand how much insurance your employer provides. Subtract that amount from your estimated need. (While you’re at it, make sure your beneficiary form is up to date and doesn’t inadvertently divert your dollars to your ex.) Voila. Now you have the amount of life insurance you need to purchase. Let’s go shoppin’.
Buying insurance through your employer
If you work for a relatively large company, you can often purchase life insurance through your employer. This kind of policy is usually a one-year term policy, and the price is based upon your age. The advantages of this approach is that it is easy to sign up and typically, it does not require a medical exam. One big disadvantage is that if you change jobs (your choice or theirs) you may lose your insurance. If you purchase the insurance one year at a time, the rate will rise with your age and with inflation, so this approach can be considerably more expensive.
Getting other bids
If you’re considering getting long-term term insurance (e.g. a 20-year policy), you should get several bids. It’s a relatively large expense, and you’ll be locked in for many years. It’s worth making a few calls. You should get a quote from your insurance company. In addition, many professional and social organizations offer term life policies through their group life policies. Check out the organizations you already belong to and see if they offer discount life insurance.
Comparing offers
The best rate I found for a 20-year term policy was through my current insurance company. For the same amount of insurance through my employer, over 20 years, I would have paid more than five times as much as through my insurance company. If you include a 3% annual increase in the premiums, I would end up paying 7.5 times as much, purchasing the insurance through my employer. So with a little bit of homework, I saved about 87%.
Another important factor when choosing life insurance, is that you want that company to be around for at for least the term of your policy. Check out the financial solidity of the insurance company through A. M. Best or Standard & Poor’s; they rate all major insurance companies.
According to the actuarial data at the Social Security website, the probability of my death sometime in the next 20 years is about 13.7%. You might, therefore, expect that the total of the premiums to be paid over the term would be about 13.7% of the death benefit, plus a little bit for profit for the life insurance company. In the quote from my insurance company, the premium is only 3.2% of the death benefit. That low rate is only available for the “Ultra Premium” low-risk category. To qualify, I’ll have to pass their lengthy interview about my habits and family history and a blood test. I’m a healthy non-smoker with a good family history, so if I don’t qualify, I don’t know who would. But we’ll see how smoothly the process goes.
Summary
For life insurance, the first step is to decide whether you need it, and if so, how much. Shop around to find the best rate, checking insurance companies and organizations you belong to that offer discounted group life. Compare it to what your employer offers, and don’t be surprised if you can get a much better deal elsewhere.
About the Author: Helen Maynard writes about her favorite topics at ScienceAndMoney.com. By profession she is a scientist/engineer working with semiconductors. She is peculiarly interested in personal finance and is studying to become a Certified Financial Planner.
Disclaimer: The information in this article is presented for educational purposes only. If you have questions about your particular financial situation, please see a financial professional.
Image Credit: Laineys Repertoire at Flickr.
Carnival: This post was included in the 266th edition of the Carnival of Personal Finance hosted at Nerdwallet.
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