This month, the focus of my conversations with clients has been around life insurance and checking to see if they have adequate coverage to meet their financial objectives and responsibilities. Today’s blog post is a deeper dive on one of the benefits offered through your employer, life insurance.
Did you know that you may already have a life insurance policy through your employer? That is, if you are traditionally employed. Many companies provide their employees with a small life insurance policy with a death benefit equal to one or two times salary.
The death benefit is the amount your beneficiary would receive should something happen to you. I strongly encourage you to check your life insurance beneficiaries to make sure its consistent with your wishes. Big life events like marriage or having a child is a great time to revisit these beneficiaries and make sure things are current.
The death benefit from your employer sponsored policy may or may not be sufficient, depending on your stage of life and other financial commitments.
How Much is Enough?
It depends.
It depends on your personal situation. You might want to consider a life insurance policy if you fall into one or more of the categories below:
- Married with a children
- Married with a mortgage/liabilities
- Single with children
- Single with outstanding debts (student loans, mortgage)
An old rule of thumb is to ensure each working spouse at 10x their salary. While this is a great place to start, your family’s financial picture may include other commitments like a home mortgage, outstanding student loans or future college expenses. Its important to factor these other financial elements. I like to use the following formula with my clients to determine an appropriate level of insurance.
Death Benefit = salary x 10 + total liabilities
Below is a fictional case study to show you what I mean:
- Paul and Denise are married with 2 children.
- Paul makes $150k/yr. and Denise makes $200k/yr.
- They have a home mortgage of $450k.
- Outstanding Student Loans of $50k
If you apply formula for both Paul and Denise, Paul should look at getting an insurance policy with a death benefit of $2M and Denise should get a policy with a death benefit of $2.5M.
If there is a stay at home spouse in the equation, it’s important not to overlook the “income” they contribute to the family. If the stay at home spouse is responsible for child care, treat the money that would be spent on child care as that spouse’s income.
Term vs. Whole Life
I will start off with a disclaimer, I am not licensed to sell life insurance but I do want to point out the differences between a term policy and a whole life policy.
Term
Term insurance is insurance coverage that is in-force for a specified term. Typical term amounts are from 10 years to 30 years. It’s important when using term to make sure you align the extent of the term with the liability. As an example, if you are purchasing a life insurance policy to protect your children if one parent suddenly passes away and income drops, its important for the term of the policy to last up until the child is an adult and on their own financially.
The pro of term insurance is that is very cost effective insurance and much less expensive than whole life insurance. The downside, is that the policy will expire at the end of the term. If something were to happen to the insured outside the term window, no benefits will pay out. This is why working with a professional to make sure the coverage terms are in alignment with financial milestones is critical.
Whole Life
Whole life insurance is insurance coverage that is in-force for the insured’s whole life. Another major difference between term and whole life is that there is an investment component to whole life insurance. These type of policies will have a cash value that will build over the years and can potentially be invested depending on the policy.
While having an investment component with an insurance policy can be appealing, there are extra fees and costs associated with these type of policies. The major con of these whole life policies are the fees and higher premiums. Your premium dollars don’t buy as much insurance coverage compared to term policies.
Another disclaimer. I do not sell life insurance. What I will say, I work with my clients to make sure they have the best tools in their financial tool belt and in many cases that tool is term life insurance.
Do I Need Insurance?
If you are single or married without children, additional life insurance to supplement what the employer provides is likely not necessary. The one caveat is if you have prior financial commitments, like a student loan, it may make sense to buy a term policy with a small death benefit to cover the liability. This would protect your spouse or other family member should something unexpected happen and the liability falls to them.
If you’re wondering about your specific life insurance needs, I encourage you to have a conversation with a trusted financial advisor to explore more.
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