One of the questions we’re often asked is, "Why consider purchasing life insurance when that benefit is already offered by my employer?" Today, we’re going to unravel that mystery.
It Doesn’t Have to Be Either/Or
Typically, employer policies are small (for instance, 1-3x salary for a life insurance policy – which isn’t nearly enough coverage for most people but we’ll get to that in a minute) and you don’t have to go through the underwriting process unless you’re looking for a larger amount. Premiums are usually paid on a pre-tax basis. In other words, securing employer coverage is pretty quick and painless. It’s worth considering for this reason. And, if you have medical conditions that make you believe you might be turned down for an outside policy, an employer plan is a very good option for at least securing some coverage.
So, why do you need to supplement employer coverage with another policy? Industry experts tell us a good rule of thumb is to have life insurance coverage up to 20 times your annual salary. With most employer plans offering up to 3x your annual salary, this is clearly not enough. And just a few years ago, the recommendation was 7-10 times, but now there are two key reasons for this increased estimate:
- At 20 times your annual income level, it is most likely that at today’s interest rates, you can possibly produce enough annual interest income annually to replicate the annual income used in the computation.
- This would allow you to only have to touch the principal for larger items (college tuition, eliminating debt, weddings, vehicle purchase, etc.) and thus, have a more stable financial position long term.
The Downside to Employer Policies
Your Employment Isn’t Usually Forever...
First and foremost, there is no guarantee you’ll be with your employer forever. These policies almost always terminate when you leave the company. If you’ve been with the company for a while, health issues may have crept up that make getting an individual policy more difficult than when you first started.
...But What if It Is?
If you retire at age 65, chances are you’ll still want to have a policy in place, but your coverage may terminate with retirement.
The Tax Man Cometh
In the case of disability coverage, employer plans present an interesting (and not so pleasant) quirk. You’ve paid for your premiums with pre-tax money – or your employer pays all of the premium – and the benefit is, let’s suppose, 60% of your salary (which is about the norm). Sure, living on 60% of your salary would be tough, particularly if you’re paying off medical bills relating to your disability, but it’s reasonable to think it’s doable. But wait…there’s untaxed money out there! And now is the time that the tax man cometh. That’s right, your 60% of salary benefit will be taxed – meaning you’ve got much less to live with than you may have counted on. This is not usually the case with disability policies secured outside of the employer environment because the policy was paid for with money that’s already been taxed. This allows you to realize the full benefit amount (in our example here, 60%).
You Could Probably Do Better
Since any employee can secure coverage without underwriting, there’s a chance these rates aren’t the best you can get. Underwriting ensures you’re a good risk and therefore, rates are usually less expensive when you have to go through it. While most don’t realize it, your alumni association can be a good source for these policies. To learn more about the benefits and insurance options available to you through your alma mater visit www.alumniinsuranceprogram.com.
Only you know your exact circumstances, and whether an employer plan, external plan, or both are right for your situation. But we hope this post helps you understand the differences so you can make an informed decision. If you aren’t sure how much you need (with employer coverage, going it on your own or combined) try this Free Life Insurance Checkup tool to get a quick assessment of your needs.