Employer Provided Life Insurance: 5 things I wish I knew

Employer Provided Life Insurance – Technical Aspects

Many times employer provided life insurance is offered at no cost to the employee. That is possible for life insurance through work. All you need to do is sign up during annual open enrolment at the time of choosing employee benefits, and you would have the employer paid life insurance coverage. This is true for most individuals at their place of work. These life insurance policies are usually known as basic life insurance plans they tend to be anywhere from $10,000 to $25,000 in total coverage. Let’s understand Group life insurance vs. individual life insurance. Some employers might offer supplemental group coverage which allows the employee to have additional coverage for pennies on the dollar, in many cases with no evidence of insurability even. For instance, if a person is earning 25,000 per year in gross salary, and this employee purchases supplemental insurance of 4 times their salary this person will now have $100,000 in coverage with full coverage. This means that the policy will cover the employee in the event of death due to natural causes or accident for that amount of $100,000. If the employee next year gets a promotion and he or she is now earning $30,000 per year and doesn’t make a change in his/her benefits that employee now has $120,000 in total coverage.

One of the most significant advantages of purchasing these policies is that they tend to be very inexpensive as I mentioned before, they are usually charged per unit. One unit can be the equivalent to 1000. Using the above scenario before the promotion, the employee would have had purchased 100 units. The cost per unit could be for someone between 25-29 years of age about .08 cents. That means that this employee could be paying a total of $8 per month for $100,000 in coverage.  Someone that lies between 30 and 34 might pay a little bit higher about 0.9 cents per unit. Check with your human resources benefits specialist for rates.

One of the things to keep in mind is that the cost per unit adjusts as the person goes into the next age bracket. The normal brackets could be 18-24, 25-29, 30-34, 35-39, 40-44, 45-49, 50-54, 55-59 and 60-64. What most people don’t know is that the cost per unit increases at a bare minimum rate in the first 5 to 6 age bands. However, once the employee hits the 50+ mark, the rates jump drastically. They can sometimes be even $1 -$3 per unit cost or even higher. This is something to consider if all you’ve been relying on for your life insurance is your group coverage.

In 2015, 44% of life insurance policies that were purchased were through group coverage. One of the disadvantages of group life insurance is that it would be a risk of being covered by only this coverage. In most of the cases, they won’t get enough coverage as you expect said by Todd Katz, Executive Vice President at MetLife.

Employer provided life insurance – the most popular Policy in U.S.A

According to the study by LIMRA, a life insurance research group, and consulting company, most of the Americans are using Employer provided life insurance policies as compared to the policies purchased by the individuals outside of their work.

When people sign up, they don’t bother visiting the coverage of employer-based life insurance again. Nearly 40 % are the people who don’t make any changes in the coverage as founded by LIMRA research.

According to Rachel Podnos, a certified financial planner of Washington D.C. observed that the most of her clients are covered with life insurance at work. They are not entirely versed in the amount of the coverage they have. The clients she gets in touch with are mostly having the issue of insufficient life insurance.

Usually, the coverage that employers offer in employee-based life insurance is about twice the annual income of the employee or maybe even lesser as much as $50,000. The coverage works until your job continues. It’s good not to have life insurance at present if you are single and you don’t have any financial dependents. Also if you have no debts that you’ll leave behind and your burial expenses are already 100% pre-paid then life insurance is probably not a necessity for you.

However, if you’re the head of a household or a stay-home parent, you most likely need to have some coverage. The net amount of one or two years of your annual salary will not be enough to pay off for your house mortgage or any other significant financial consideration such as amount needed for the higher education of your kids, estate taxes, and your income replacement.

Tips to choose the right life insurance

Some of the tips to assure that you purchase the right amount of coverage:

•    Decide whether you are in need of life insurance

Life insurance needed or not depends on your financial obligations. Even as a single person, if one of your parents co-signed for your student loan, then you should have life insurance for the amount of the loan. In the event, you were to pass away your parent still liable for the balance of that loan. On the other hand, if you’re single and have not financial liabilities and your final expenses already taken care of, then it’s safe to assume that you are not in need of life insurance. If one has to undergo financial crisis after your death or anybody depends on your income currently, then you should have adequate life insurance coverage.

•    Compute the amount of coverage you want

It is essential to know what amount of coverage is required by the persons who are financially dependent on you if your income stopped suddenly due to your loss of life. The rule of thumb is to take the number 26 and subtract it from your youngest child’s age. The number 26 is usually used when individuals finish college considering they’ll have a master’s degree. That number would be the number of years you would need to have your life insurance in force. Another way to determine the length of time one needs to keep their life insurance for is by the number of years left on their mortgage whichever number comes last.

One way to determine the amount of life insurance is to usually add up all of his/her current liabilities and future liabilities such as mortgage loan balance, credit card debt, vehicles loans, etc. They should also include in this total their future debt such as funeral cost (depending on your age now you would either double today’s cost or triple) you would also include children’s college tuition and estate tax depending on your financial status.

Another way people calculate their needs for life insurance is by multiplying their annual gross income by ten times. It is recommended by experts to purchase as much coverage as is enough. Also, decide the period for which you want to replace the income.

•    Decide the time of the life insurance

There are two most common types of life insurance –Term & permanent Life Insurance. Term insurance will only cover you for a specified period. Permanent Life Insurance will cover you in most cases for the remaining time of your life. Term insurance will cover you for a specific time of coverage; the most common time periods one can choose from are 10 years, 20 years and 30 years.  Permanent life insurance depending on how it’s structured could be designed so that it lasts the entirety of the individual’s life not to exceed the age of 120, the policy would be well funded, and it will not lapse. When comparing both options, term life insurance is more affordable than permanent insurance for obvious reasons. The chances of an insurance company paying a claim on someone in a window of 10,20 or 30 years is less likely than someone that will be covered until the age of 120.  Experts recommend purchasing a blend of the two options. For instance, if your youngest child will turn 26 in 15 years, then you should buy a 20-year term life policy with the total amount of coverage you determine you need based on the formula provided on the paragraph above. You should also purchase a permanent policy for a smaller amount perhaps 20% – 40% of the term life policy. This second policy will cover your final expenses and any other liability you might acquire later in life. Anyone who has small children, financial obligations, debts to pay should choose the life insurance that covers all their expenses during this period. When the term comes to an end, your kids will be independent to pay their expenses. You will have enough savings to provide for your partner, and you will need less life insurance during that later part your life.

•    Choices to shop for life insurance

There are plenty of options for you to buy life insurance. You could go through your employer and purchase the supplemental life insurance, the one that is multiple times your income or perhaps your employer is working with a wholesaler that offers individual life insurance payroll deducted. The advantage of these plans is that they’re conveniently deducted through payroll, and some are portable. The disadvantage is that if you miss a paycheck, these policies could lapse if you fall behind with our premiums just like any other policy. However, these policies are hard to keep track because they’re put in this pool of deductions, and one can get lost in all the transactions going through your paycheck. One way to make sure your policy through work is portable is if your application was put through full underwriting meaning that you were asked medical questions and or were asked to have a urine and blood work sample collected. The second option is that you can choose to buy an individual policy through your auto insurance agent or the carrier directly. Many auto insurance companies also offer life insurance and might offer the “bundle” discount. The downside to this is that since many of these companies life insurance if not their main line of business, the options might be limited with either term limits or coverage amount or even customization options. The third option is going directly to the insurance carrier is that you could get a vast array of comparisons of their products within that carrier. They will tell you about all the term options and all their permanent options and any added features to each of the plans in detail. The disadvantage is that you would not be able to compare with other carriers outside with an unbiased opinion. The fourth option is to go online and shop to see what is being offered. The advantage of going online is that you get a quick price and you can avoid the extra cost that would have incurred if you bought from an agent. The downside to this is that many quoting engines are designed to generate easy and quick quotes it doesn’t necessarily mean this is the best one for you. Many carriers have special features that might suit very well for you and your situation.For instance, you might have a child that is a special needs child, and this is important because the age of 26 as a maximum age he/she will be home is false. The fifth option is speaking to a broker that could know your individual needs and family situation and future goals to determine the best coverage for you. The disadvantage is of speaking to an agent is that he/she is new in the industry and is not familiarized with a majority of the options out there. Another disadvantage is that he may prefer one company over another. Buying life insurance is an important decision because you’ll buy it knowing and expecting to do what you were told at the time of purchase and your dependents count on you to make the right choice. Be sure to use the right source for your decision.

Group Life Insurance vs. Individual Life Insurance

Whether you purchase it from an employer or purchase it directly from an insurance company, you will find pros and cons in both.

One factor to consider when shopping for life insurance is that if you have been diagnosed with a chronic or critical illness in the past, or your height and weight are on the obese side, or you have a DUI or have a felony on your records or have an undocumented immigration status then Employer-provided life insurance might be your only choice at this time. The primary reason is that majority of these group life insurance master policies are guaranteed issued. As the title says, they assure you that they will issue the policy regardless of your health history, height and weight, legal status or criminal or driving record. Our recommendation is to get as much insurance as you can while you can. On the other hand, if you’re healthy, have an average body type, clean driving record, valid social security, and clean criminal record and have dependents you might want to purchase life insurance outside of the provided life insurance through work so you can secure the rate and obtain a favorable rating that would be the reason why you need life insurance outside of work. The limitation of having coverage under employer is that you will not be able to fulfill your needs. If you have good health and you are young, you could find coverage at a low rate. But the best part is that you will not be as limited to the amount of coverage like you would be through your work. Get the amount of coverage you need outside your “employer coverage” as soon as possible before things get changed, e.g., wasted time and rise in cost.

Questions to ask before buying coverage from an employer:

• If I purchase the maximum amount of coverage allowed through work, would this be adequate to fulfill the financial obligations of my family and those who depend on me?
• Can the coverage be portable after leaving the job?
• Would the requirement be the same as if I was applying outside of work?
• Would this coverage be payroll deduction, if so is there an additional admin fee for the convenience of being payroll deducted?
• Would the rate increase as I get old?

When you are buying additional coverage from an employer or outside, you need to make sure you have enough coverage. This is something that you do for your loved ones and to maintain their lifestyle. So, do your due diligence next time you see yourself in a situation of deciding the right coverage for you, your families’ livelihood depends on this decision. Please contact us for more questions.

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