Life insurance is a fundamental part of one’s financial safety net. But having life insurance and having enough of it are two different issues.
In fact, the Life Insurance and Market Research Association (LIMRA) estimates that 48 percent of households have an average life insurance coverage gap of $200,000.1
“It’s smart to periodically review whether your existing coverage is adequate, and open enrollment period is a good time to do it,” said Lee McGowan, managing director at Monument Group Wealth Advisors, in Concord, Massachusetts, in an interview. (How much do you need? Life insurance calculator)
Employer-provided life insurance
If offered without cost, you should always take part in your employer’s group plan.
“Take it, no questions asked,” said Sean Flynn, a financial advisor at Essex Financial Services in Southport, Connecticut, in an interview. “It’s likely a multiple of your salary, and is guaranteed without any medical exam.”
Since the policy covers the group as a whole, rather than individuals, the premiums can be substantially lower than what you might find for comparable coverage on your own. But keep in mind that being part of a group means you lose some individual choice.
For instance, when you choose a policy on your own, you have control over the type of insurance you are purchasing, like term life insurance or whole life insurance. With a group policy, that kind of decision is out of your hands.
Risks of group plans
When shopping for an individual plan, you have the ability to vet the policy provider. This isn’t the case with group life insurance plans — your employer makes the choice.
Additionally, if your employer decides to alter the plan in the future, or to discontinue it altogether, you could find yourself without coverage.
One safeguard is to opt for a supplemental plan through your employer, if it offers one. But this still might not help if you’re laid off or change jobs. While some supplemental policies are portable, meaning you can take them with you to your new job, the premium can skyrocket.
“A client had a $2 million supplemental policy through his employer, but decided to change jobs. The policy was portable, but the premium was multiples higher. To keep the same payment, he would have had to reduce his coverage substantially,” said McGowan.
He suggested that his clients compare the cost of buying an appropriate level of insurance coverage as part of a group versus that same level as an individual.
“The group plan is usually less expensive if you’re early in your career, but once you reach your mid-40s, there is a crossing point where the individual plan becomes a better option,” McGowan said.
Here’s why: Group plans are structured as annually renewable policies, meaning that the cost can change from year to year. If an individual purchases a term life insurance policy on his or her own, the premium is locked in for the term, usually 10 or more years.
In addition to that, in group plans, younger people are funding the plan for older colleagues.
“Employer-provided life insurance premiums may be the same for everyone at the company and not adjusted properly based on age or gender,” said David Haraway, a principal at Substantial Financial in Colorado Springs, Colorado, in an interview.
“Younger workers and women have longer life expectancies, but their premiums might be the same as everyone else’s,” he continued. “If so, younger workers and female workers would subsidize older male workers. I usually recommend workers not contribute their own money, but seek lower-cost term insurance in the open market.”
There are tax implications for purchasing additional group life insurance through your employer as well. The government taxes the value of group life insurance over $50,000 based on what you pay for it versus premium rates established by the IRS. That cost can add up over time as you get older since projected premiums for older individuals are often higher than group life insurance rates.
Don’t underestimate the likelihood of changing jobs and losing the coverage you counted on at your previous employer. The Bureau of Labor Statistics says people born from 1957 to 1964 will have held, on average, about 12 different jobs during their careers.2 Workers of younger generations will likely switch jobs even more frequently.
That means younger workers should consider developing their own individual plans, financial advisors recommend.
“Keep it simple. Take advantage of your employer’s group plan, and talk to your financial advisor about an individual term life policy so even if you switch jobs, you’re protected,” said Flynn.
Starting early costs less
For people early in their careers, purchasing life insurance in addition to their group plan may seem like an unnecessary expense. However, premiums for individual policies are generally at their lowest during this time.
For instance, a healthy, non-smoking 30-year-old can secure a 20-year, $250,000 term life insurance policy for about $160 a year, according to a study by LIMRA and the nonprofit Life Happens.3 (Related: Get your own life insurance quote)
“Once you have financial liabilities, like loans, and are starting a family, think long-term about your insurance.” McGowan said. “When you get engaged or are even thinking about marriage, lay the groundwork for solid financial protection.”
Premiums increase as people age — that’s the obvious risk of waiting to purchase life insurance. There’s a more significant risk — being denied coverage outright. Many health issues can put people into a high-risk pool, including diabetes, heart disease, elevated liver function, or cancer.
For example, Rita Cheng, chief executive officer of Blue Ocean Global Wealth in Gaithersburg, Maryland, shared the story of a client during an interview.
“He didn’t have an individual policy when he suffered a heart attack in his mid-50s. Now in his 60s, he’s desperately trying to find affordable coverage, but can’t,” said Cheng. “Even less serious health factors like being overweight or asthma can make getting coverage difficult. You have to get insurance when you don’t think you’ll need it.”
Measuring the gap
So how much insurance might you likely need beyond what your employer offers? The gap may be larger than the $200,000 average that LIMRA quotes.
“Many people don’t appreciate what the loss of support by either member of a marriage means,” said Haraway, adding that it’s not a reality people want to face.
“A 30-year-old with two kids might expect another 35 years of earnings,” he continued. “If he or she would average $100,000 a year over that time — remember these paychecks will grow with inflation — the total earnings to be replaced is $3.5 million.”
Beyond the basic income question are matters of future family needs, like a mortgage or college educations. Many people opt to consult a financial advisor to sort out the exact needs and options.
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1 LIMRA, “Facts About Life 2016,” September 2016.
2 Bureau of Labor Statistics, “Number of Jobs, Labor Market Experience, and Earnings Growth Among
Americans at 50: Results from a Longitudinal Survey,” August 24, 2017.
3 Life Happens, “Insurance Barometer Study 2017,” April 25, 2017.