How to Evaluate Employer Benefits Packages (Part 5): Life Insurance
I realize that life insurance isn’t the most exciting topic. In fact, some people may not want to think about it at all. If you associate it with coffins and funerals, that makes sense. However, I encourage you to think of it instead as a gift that you leave your family members. It enables them to pay for your final expenses without incurring financial hardship, and it can continue to support them financially in your absence.
How Does Life Insurance Work?
Remember the insurance piggy bank concept we discussed in the post about medical benefits? Life insurance works in a similar manner. You contribute a fixed amount, called a “premium”, to the life insurance piggy bank, and it gets combined with premiums from other plan members. If you die, a non-taxable cash payment is pulled from the piggy bank and distributed to the people you’ve selected as your beneficiaries.
There are many different variations of life insurance, but the simplest and most often recommended type is a term policy. This provides coverage for a specific term, or period of time. If you purchase a personal life insurance policy outside of work, the term is a set number of years. In those cases it is a personal policy and the cost of your premium is individually determined based on the amount of coverage you desire and your risk of dying--usually determined as a factor of your age and sex. If you’re young and healthy, that means you can expect to pay a lower premium. This is one of the reasons it’s good to obtain a term life insurance policy early in your life.
If you use your employer-provided life insurance policy, then the term of coverage period is the same as your employment period. In this kind of policy, the cost of your premium is likely determined based on the risk associated with the entire population of covered employees.
If you change jobs, get laid off, or become disabled, you may be able to convert your employer provided policy to a personal policy, but usually not at the premium rate you were getting as part of a large employee group.
There is also a chance that a job change situation will result in losing your employer-provided life insurance benefit completely. For this reason, I recommend also having a personal life insurance policy in addition to what your employer offers.
Many Employers Offer Free Life Insurance Coverage
Many employers provide a basic level of life insurance at little or no cost to employees. This plan usually consists of one times your annual salary or some other fixed dollar amount. In addition, employers may offer supplemental life insurance options that allow you to purchase additional coverage. It can be a good idea to take advantage of this low-cost group coverage, especially if you may need to replace your income to support your family in the event of your death.
How Much Life Insurance Do You Need?
How much life insurance you need depends on several factors. If you’re the only person in your household, you probably just need enough to cover your final medical bills and funeral expenses. If you’re married and have children, you also need to plan on replacing the income stream that supports them. A good starting point is to have life insurance coverage ranging anywhere from 10 to 20 times your annual income.
To get a more accurate estimate, I recommend meeting with a trusted financial advisor who can help you consider related issues and prepare for your family’s future. There are also some free resources available online. Your employer, or the Insurance company providing the Life Insurance benefit provided by the employer may also have some resources available to help with this decision.
Also Consider Coverage for Spouses & Children
As you’re evaluating employer benefits and making decisions about life insurance plans, you should also consider coverage for your spouse and children. These voluntary policies are also usually provided by your employer.
Remember that even if your spouse doesn't bring in outside income, they are still a valuable financial asset to the family because they likely provide services like cooking, housecleaning, and childcare that could cost thousands of dollars per year to replace. Many policies also provide a lower amount of coverage for children, primarily to cover medical and funeral expenses, for a very small additional cost.
Remember to Update Your Beneficiaries Regularly
As the busyness of life happens, it’s easy to forget to make updates to your insurance policies, but a quick annual review of the policy amounts and your beneficiaries (the people you designate to receive funds from your life insurance policy) can prevent a lot of problems in the future. Imagine the complications when an employee gets remarried and forgets to remove their former spouse from their list of beneficiaries!
Next Week: Disability
We’re almost to the end of our series on benefits packages! Next week we’ll talk about disability and how to prepare for unexpected injuries and illnesses. In the meantime, if you haven’t already, I encourage you to check out the other benefits posts on Medical Insurance, Retirement Plans and Time Off Benefits.
Written by Brian Mitchell
Brian Mitchell has experience leading Total Rewards strategy and implementation for large employers. He enjoyed helping his own millennial children navigate first-time employment and benefit selections. He hopes his insights simplify the process for you as well.
Benefit Boosts by Brian Mitchell© – Vol 2024-006
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