Beyond Workplace Life Insurance: 3 Steps to Ensure You're Adequately Covered
If you’re a full-time worker in the U.S. today, there’s a good chance you’re taking advantage of a life insurance benefit offered by your employer. The U.S. Bureau of Labor Statistics reports that 72 percent of full-time, private-industry workers across the country had access to life insurance benefits. And among those who had access, the vast majority—98 percent—took advantage of the benefit.
But do you really know what you’re getting with employer-sponsored group coverage?
“Because group life insurance typically includes a certain level of coverage for free, people don’t always take the time to understand what they’re getting,” said Marissa Savino-Williams, wealth management advisor for Northwestern Mutual. “They know they have something, but they don’t necessarily know the details of the policy. And as a result, it’s not unusual for employees to make inaccurate assumptions about how much coverage they have or how much coverage they need.”
To ensure you and your loved ones are adequately protected, Savino-Williams suggests taking these three steps:
1. Determine how much life insurance you need. At the very least, most people want to make sure they have enough life insurance to accomplish two things: pay off the mortgage and fund their children’s college education. But it’s important to think beyond those big-ticket items, according to Savino-Williams, to consider all of what it might take to maintain your family’s lifestyle if you die. How much would they need to cover monthly expenses, such as utility bills and groceries, or to fund quality-of-life experiences like sports camps and ballet classes for the kids and vacations for the family? A financial professional can help you determine how much life insurance you need to ensure your family can live the life you envision for them. In most cases, basic group insurance will not be enough total coverage.
2. If you need more insurance, decide whether you’ll buy it from work or directly from an insurer. If you already participate in (or have access to) a group life insurance plan at work, you may be able to buy additional coverage through your employer. And while increasing your level of group life insurance may cost less than what you’d pay for a similar amount of individual protection purchased directly from an insurer, there are tradeoffs.
“With group life insurance, you have very little control,” said Savino-Williams. “You may be limited in the amount of coverage you can buy. Your employer could change insurance companies. Your policy and premiums could change. And if you leave your job, your coverage will typically end—although in some cases, you may be able to take it with you if you pass a physical and pay an increased premium.”
That’s in contrast to an individual life insurance policy that you personally own. An individual policy is portable, which means it covers you wherever you are. You can lock in premiums and your ability to be insured. And depending on the type of policy, it may also accumulate cash value or be eligible for dividends. Many people have a combination of employer-sponsored and individual life insurance coverage.
3. Don’t just buy a policy, develop an insurance strategy. One of the most common mistakes people make with life insurance, according to Savino-Williams, is that they view the purchase of life insurance as a transaction: They buy a policy and that’s the end of it. Instead, she suggests thinking about life insurance in the context of your overall financial plan, which will evolve over time.
“For example, when you’re young and have limited cash flow, you may choose to buy mostly term life insurance because the premiums are initially less expensive,” she said. “But over time, as your priorities, goals and cash-flow situation change, you should consider converting some or all of that to permanent life insurance. The premiums are higher, but permanent life insurance comes with other benefits—most important, coverage that never ends, guaranteeing protection for your family for your entire life and leaving a legacy to future generations. In addition, a permanent life insurance policy has the potential over time to build equity, or cash value, which can become a source of funding you can access at any time to help meet other financial obligations.”
Employer-sponsored life insurance is a great benefit. But if you’re fortunate enough to have it, make sure you understand what you’re getting. Then compare the benefit against what you’d want to have available to your family if you could no longer provide for them. And if you decide you need more coverage, consider a mix of employer-sponsored and individual coverage for greater control today and greater flexibility for the future.
Dividends are not guaranteed. Utilizing the cash values through policy loans, surrenders of dividend values, or cash withdrawals will or could reduce the death benefit, necessitate greater outlay than anticipated or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC).