One of the most overlooked parts of an overall financial plan is the benefits package you receive from your employer. Two weeks ago we talked about health insurance and the decisions that you should be thinking about within your overall benefits package. Life insurance is an election that you will have to make every year within your employer's benefits plan. I have found that often people don't ask themselves the tough questions when it comes to this election, nor do they understand what the coverage will take care of in the event of a premature death in the family.
Remember, that your overall life insurance election will generally include individual group life insurance, spouse/partner life insurance, children life insurance, accidental death and dismemberment insurance, and sometimes a group universal life insurance option. Understanding the nature of what these cover and their overall portability are a critical part of making sound financial decisions.
- How does my group term life insurance work? Generally, most employers will give you some type of basic coverage for being an employee in their company. This basic coverage will either be a flat amount (i.e. $50,000) or it may cover up to 1x your salary. Remember, that the cost of the coverage up and above $50,000 will actually add some imputed income that you'll be taxed on every year which is why you will see a line item called group life insurance on your paystub. Most large employers will allow you to sign up for supplemental life insurance coverage as a multiple of your salary which normally is anywhere from 2x your salary up to 5x your salary. Unfortunately, most people don't explore two difficult questions. First, is the actual cost of the supplemental term insurance cheaper than buying term insurance outside the company? To do a fair comparison, you will need to analyze the overall rate over a 10, 20, or 30 year time frame as costs generally escalate every five years in a group plan. Second, is my life insurance plan portable? If you leave your job or your job leaves you, what happens if you cannot qualify for new coverage due a change in your medical status? If your policy is not portable, that could cause a major gap in your overall financial plan.
- What about group life insurance for my spouse/partner or kids?Most group benefits package will allow you to purchase life insurance for your spouse or partner up to some fixed dollar amount such as $100,000. This can also be a cheap way to pick up some coverage without having to prove evidence of insurability, but the big question again becomes around portability of the policy. I am not a huge fan of buying life insurance on children, but for those of you who may want to have some protection in place for final and funeral expenses the children's policies through work can be just a few cents per pay period.
- The accidental death and dismemberment policies seem really cheap. Shouldn't I just pick up my life insurance coverage through that option? In the event of an accidental death, this insurance will pay benefits in addition to any life insurance held. Some of these accidents include drowning, traffic accidents, homicide, heavy equipment accidents, etc. Even though these policies are cheap, you need to make sure that you have the right amount of core life insurance in place based upon your personal situation. You don't want to gamble by having AD & D insurance in place of getting regular life insurance hoping that in the event of death your family will be able to collect on this policy. I have seen very few of these cash out over 20 years of giving financial advice. I might only recommend taking this type of coverage if you are in a high risk position.
- My company offers group permanent life insurance, should I take advantage of that program? One of the important pieces to analyze in your financial plan is what type of life insurance you should have in place. There are usually both short term and long term exposures in any overall financial plan. You normally want to use term insurance for your shorter term risks and permanent coverage for longer term risks such as providing an income stream for your surviving spouse or kids. Since group life insurance has both insurance and a cash value component to the policies, this could be an option to have another form of forced savings in addition to your 401(k) plan, Roth IRA, or other savings vehicles. This type of coverage has a potential living benefit along with the death benefit. If you don't have to go through a medical underwriting process, this has the added attraction of being an employee benefit. Group permanent life insurance coverage is certainly something to consider, but be careful and read all of the disclosures so you know what you are getting into when you sign up.
Analyzing these benefits today takes nothing short of an engineering degree. As the CEO of your family finances, the first real step is in determining your needs. This is not something you should do by a rule of thumb, but really analyze your own situation through both a needs analysis and a human life value approach. This will give you a better answer on how much coverage you really need. From there, you can determine the right amount and best avenues to buy your life insurance.
Go to www.oxygenfinancial.net to request a consultation to figure out if you have chosen the right benefits from your employer. If you are a small business, we can set them up for you and shop the market for the best possible plan.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc
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oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice and Smart Money Moves to the X and Y Generation.
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