Don’t Rely On Your Employer For Life Insurance
When it comes to financial planning life insurance is one area that is often overlooked. I’ve asked many clients about their life insurance coverage only to be told dismissively, “I have it through work.”
“Really? What exactly do you have?” I ask them.
At that point, there will be a pause, a bit of hemming and hawing, and finally they will answer with a curt “I’m not really sure the exact amount. But I’m good there.”
I’ve come to the conclusion that just being asked about life insurance by a financial planner brings up a wall of defensiveness with clients. It seems they feel they’ll be sold something that is not in their best interest.
Life Insurance Industry Has Hurt Itself
You can’t blame clients for thinking this way. After all, life insurance salesmen are notorious for their inability to be told “no.” In fact, many a sales trainer foolishly subscribes to the notion that a salesman needs to hear seven nos before the client will say yes.
Of course, this is idiotic. Any advisor or manager who advocates treating people in such a way I implore you to get out of the business now! You are hurting the wonderful work a real advisor is doing by making clients hesitant if not outright hostile to engage us for fear of being sold something.
No good financial planner will allow a client’s initial dismissiveness be the end of the discussion, however. A good financial planner will challenge the client, even if it means making the conversation uncomfortable, because life insurance is too critical to overlook.
Proper Financial Planning Includes A Life Insurance Analysis
“Just so I’m clear,” a good planner will say. “You do have kids and debt. So it’s important to know exactly how much life insurance you have and the types of it as well. I’m going to put that down on your to-do list for things we need to discuss in our next meeting, okay?”
At that point the client will nod and somewhat sheepishly agree to “look into it.”
Eventually, the client will get back to that planner with a list of the various coverages they have through work. There’ll be a lot of Accidental Death and Dismemberment (AD&D) insurance which the client believes is part of his/her overall coverage. They’ll say something like, “I have 4 times salary plus $250k in AD&D. So, I’m good.”
Accidental Death and Disability (AD&D) is Not True Life Insurance
Unfortunately, AD&D insurance isn’t true life insurance. If you die from an illness, for example, your heirs will not receive a penny under these policies. There is a reason AD&D is so inexpensive, after all, because it doesn’t provide much in terms of protection.
The client says he also has 4 times his salary. Doesn’t take a rocket scientist to figure out if this is adequate. What’s your salary? Multiple that by 4 and you have your coverage. So, if your salary equals $50k you have $200k of life insurance coverage. Is that enough?
Let’s look at a hypothetical couple, Brenda and Kevin. They have over $200k in total debt. Brenda’s salary is $40k a year and Kevin is not working. If Brenda has 4x her salary she has $160k of life insurance. That is not enough to pay off their debts. If she were to die Kevin no longer has any income coming in and yet he still has well over $40k in debt!
Non-Working Spouse Needs Life Insurance Too!
It goes without saying that Brenda should get more coverage. But don’t overlook Kevin either. Just because he isn’t earning an income doesn’t mean he shouldn’t have insurance. He has flexibility to help out around the house, get the kids off the bus, get the kids off to school in the morning while Brenda sits in traffic on her way to work. Maybe Kevin even helps with homework when they get back from school before Brenda comes home.
Let’s say Kevin dies. Who is going to watch the kids when they get home from school? Who is going to get them ready in the morning? All these activities either cost time, that Brenda doesn’t have because she has to go to work, or money through a child care provider. The costs of child care isn’t cheap by the way.
Given that Brenda and Kevin are squeezed financially right now, how much more squeezed would they be if Kevin died and Brenda had to pay for childcare? Here is a great resource on child care costs for your state. Again, it’s not cheap! (Please be advised I’m not an advocating what the authors of that article suggest. EPI is a VERY liberal think tank. But they do raise a good point on the costs of child care, nonetheless.)
Now just think if Brenda and Kevin had taken the time to actually look into life insurance. They’d realize it’s so cheap they should get policies on their own as opposed to relying solely on Brenda’s employer.
Term Life Insurance is So Cheap No Reason Not To Have It
Let’s say Brenda is 43 years old and is in decent shape. USAA.com quotes a $400,000 term policy with a fixed premium of $35 a month for 20 years(subject to this writing in late 2017). Let’s say Kevin is 47 years old, the same policy would cost $60 a month.
So, for less than $100 a month both Brenda and Kevin would have $400k coverage guaranteed for the next 20 years. If either of them died that coverage would be more than enough to pay off all their debts and have a significant amount of cash left over. All for $100 a month in premiums.
Understand Group, or Employer-Sponsored, Life Insurance
Employer-sponsored life insurance, also known as group insurance, is much different from a policy you get on your own. Essentially what happens with ANY group policy, be it Medicare, Medicaid, employer sponsored health or life insurance, is that the healthy are subsidizing the sick so the premiums get evened out for everyone.
Take two 47-year-old men, one is overweight, sick a lot, never exercises etc. The other is lean, exercises, eats right. These guys pay the same premiums. Cost-sharing is the only way for a group policy to work. Everyone in the group is underwritten the same. This actually benefits those who are not in good health. But it certainly hurts those who are in decent shape. Again, the healthy subsidize the sick.
Premiums Based On Age-Band
Another thing to understand about employer-sponsored life insurance is that the premiums are based on age-bands, say 40-44, 45-49 etc. The older you are, the higher premiums will be.
Look at the table below to see how this works for Veterans Group Life Insurance(VGLI). VGLI is insurance for veterans who separate from service and trade in their Federal Government subsidized Soldiers Group Life Insurance(SGLI). When they leave the service they are guaranteed coverage but it’s at a steep cost.
This table is from 2014 but the concept will be the same regardless of what year it is. Your premiums are based on the amount of insurance you want plus your age-band. As your age-band increases, so does your premium.
Amount of Insurance
29 & Below
HUGE Premium Increases As You Get Older!
In this case, if you are 47 you pay $88 a month for $400k in life insurance. When you hit 50 though your premiums increase 60% to $144 and then they increase another 86% when you hit age 55 to $268 a month.
The cost for this coverage has nothing to do with your physical shape, your family’s history of illness, and in many cases even if you smoke. The cost only has to do with your age and how much coverage you want.
However, If you would have locked in a policy on the private market using the USAA example for instance, you’d be paying less than $100 a month for both you and your spouse to each have $400k coverage for 20 years. You’d save thousands in total premiums compared to what your employer-sponsored life insurance may cost.
If You Have Debt, You NEED Life Insurance
Remember, if you have debt, you need life insurance. No two ways around that. What’s the best way to get that life insurance coverage? Get your own policy first because if you qualify it should be much cheaper than a policy you can get through your employer, if they even offer life insurance as a benefit.
Secondly, your own policy is not in any way tied to your employer. You can change jobs and keep the coverage, so long as you continue to pay the premiums.
What if New Employer Doesn’t Provide Life Insurance Benefits?
Go back to Brenda again. What if she got a new job but it turns out her new company doesn’t offer any life insurance as a benefit. She really didn’t think too much of this until she realized that she had no coverage. So, she decides to do what she should have done in the first place, go get her own policy.
Unfortunately, a few years ago when things were really tight at home with the economic situation she and Kevin were in, she went to the doctor to ask about anti-anxiety medication. When her doctor wrote the prescription it went into Brenda’s medical records which the insurance company checks before they issue a policy. Now, the life insurance company has some concerns, so much so that they will only cover her if she pays huge premiums.
What If You Can’t Get A Private Life Insurance Policy?
At this stage she’s stuck because she can’t afford a large life insurance premium. She and Kevin live paycheck to paycheck with no room to spare. Yet they still have all that debt but now have no insurance because her new company doesn’t offer any. If she were to die, then Kevin and the kids would be destitute.
This would all be a non-issue if she and Kevin simply bought policies when they were younger, before there were any medical issues. For instance, when Kevin was 37 he could have locked in a $400k policy for 30 years for around $50 a month. Brenda could have the same for even cheaper because she is a woman and younger. Her premiums would have been $30 a month. That means between them they could have locked in $400k of life insurance EACH at a fixed rate of about $80 a month locked in for 30 years!
But they didn’t do it. They didn’t want to talk life insurance back then. They felt Brenda’s employer’s coverage was adequate. Unfortunately they were wrong and it will cost them, either through huge premiums going forward or by the risk of not having life insurance.
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When Is The Best Time To Buy Life Insurance?
Don’t be like Brenda and Kevin. Buy a large term policy on your own NOW!
Say you are in your early 30’s, get a 30 year term policy to cover you until you hit your 60’s which is typically when you won’t need the insurance anymore. With that policy in place you most likely need not worry about life insurance again. Say you are in your 40s, get a 20 year term to cover you until you’re in your mid 60s. In your 50’s? Get a 10 year policy. Get enough coverage for a long enough term until you think you’ll be out of debt and the kids will be out of the house.
Maybe you’re single or you have no kids, no debts etc. You’re probably thinking you don’t need any life insurance coverage at all. You’re right, you probably don’t need life insurance…now. But you will, later, when you get married, have kids, maybe add weight, or develop a health issue that makes you more a risk than you are today for the life insurance company. Buy it now!
Buy it to at least cover the mortgage of a home you think you might own later. Term life insurance is so cheap now, just do it and get it over with so you won’t have to think about it again. If nothing else get at least a 250k 30 year term and never, EVER let that it lapse.
Parents, Tell Your 20-Something Kids to Get Life Insurance
Parents, tell your kids to get a life insurance policy and tell them YOU’LL pay for it if you must. By purchasing it now, when they’re young, they’ll save tons of money by not having to buy a much more expensive policy well into their 40s or 50s. Insurance is always the cheapest when you don’t need. So buy it today for your future needs and cross it off your list of things to worry about.
***This is a chapter from my forthcoming book “Stop Wasting Your Money: How to Pay Down Debt, Increase Cash Flow and Reduce Stress”. For purchase info click here.***
For more financial planning related topics click here.