Check out this interesting article from our friends at The Daily Muse:
When you accepted your most recent job offer, you likely combed through the medical and dental benefits (and, uh, the vacation day policy) with care. But there’s another section of the benefits package—one you may have glazed right over: life insurance.
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No, this is not the most exciting part of your company’s benefits, or even necessarily something you want to worry about when you’re young and healthy. But being able to decode the details of your policy—and know if you need a private one, too—is more important than you think.
Why You Should Care About Life Insurance—Now
Most people start thinking about life insurance when they have a spouse or children who are dependent upon their income. But there are a couple of good reasons to think about it now, even before you’re in that boat. For one, if you die (yeah, we know—so not fun to think about), not all of your debt does—and all those student loan bills, credit card balances, and any other debt you have will go to your spouse, parents or next of kin. Federal student loan debt dissolves upon death, but private student loans usually have a co-signer (like your parents) and is subject to collection, even after death. Car loans and mortgages are, too (though this varies by state). Life insurance money will ease the financial burden of those left behind to settle your estate.
Second, if you think you’ll have children or a spouse to support someday, it’s much, much cheaper to get life insurance now, when you’re young and healthy, than to wait to get it until later in life.
Life Insurance Policies 101
Workplace policies are generally “group term policies,” which means you’re only covered as long as you are a part of the group (i.e., when you leave the job, you don’t keep the insurance). Occasionally, policies are portable, meaning you can take your coverage with you when you leave, but don’t expect that—and ask your HR rep to know for sure.
Next, there are two types of policies: (1) comprehensive and (2) accidental death and dismemberment (AD&D). A comprehensive policy will cover your beneficiaries no matter the cause of death, for any accident or illness, whether or not you’re on the job when it happens. An AD&D policy, on the other hand, only covers work-related incidents. Often, workplace policies will include both comprehensive coverage and an AD&D rider that would pay out double the benefit if your death was caused by a workplace accident.
If your work’s policy only covers AD&D, then you should think about purchasing an additional comprehensive plan from a private provider. But even if you have a comprehensive plan at work, it’s sometimes still a good idea to purchase a private plan of your own—for example, if your coverage isn’t portable, or if it doesn’t cover the amount of insurance you need.
There are two types of private policies to know about:
- Term insurance—or temporary coverage for temporary needs—is the cheapest way to protect a large need, such as children you’re supporting. Term coverage provides a death benefit for a set amount of time—10, 15, 20 or 30 years.
You should choose the time period that makes since for you and your future life plans. For example, if you don’t yet have kids but plan to someday, then consider a 30-year level term policy to cover your future children to adulthood. If you’re finished having children, get a 20-year level term policy. If you have a business that you see as a lifelong commitment, then choose the longest term possible.
- Permanent life insurance, on the other hand, takes into account the fact that everyone, regardless of family situation, will face end-of-life expenses, usually between $25,000 and $100,000. There are two types—whole life (for your entire lifetime) and universal life (flexible coverage that can last as long or as short as you like). These policies are more expensive than term, so I recommend a small permanent policy and a larger term policy. (And if you can’t afford permanent coverage, then at least have a term policy. Most companies allow you to convert term policies into permanent policies for a larger fee within the policy period.)
How Much Coverage?
Generally, your company’s insurance will provide 1-2 times your gross annual income, but if you hold a high-level managerial or executive position, it may provide as much as 3-5 times your gross annual income.
That sounds like a lot of money, but the rough calculation of how much life insurance you need can be much more than that—up to 10 times your annual income! To know what you need, follow the acronym L.I.F.E.
Your policy should be enough to cover all of your debt—your credit card balances, auto loan, mortgage and private student loan debt.
If you have anyone who depends financially on your income, like your spouse, children or parents, you should plan to replace 3-5 years of your income.
This will typically amount to $10,000 (for example, for funeral and burial expenses), plus any medical expenses.
If you have children, it’s recommended that you plan for $100,000 per child (or enough to send them through school—which can be higher if you have young children attending private school).
In general, the average single woman needs around $100,000-200,000, and if you’re married with two kids and a mortgage, that number climbs to between $500,000 and $1 million. Once you’ve calculated your total, subtract any other money you have—savings accounts, CDs, 401(k)s or other investments—to figure out your total insurance needs.
Your work policy is likely very cheap—just a few dollars out of every paycheck. But, that doesn’t mean it wouldn’t be cheaper elsewhere: With most companies, you’ll pay a group rate (applicable to all employees, regardless of age or health), which could be more than the cost of a private plan, especially if you’re young and healthy. For example, a 30-year-old female in good health will typically pay around $15 per month per $100,000 in coverage.
If you’re looking for life insurance above and beyond what’s in your benefits package, your best bet is to compare costs. You can most likely find quotes at your auto insurance company—most also sell life insurance (and will likely offer you a bundle discount if you get both). Or, check out www.selectquote.com to shop several providers.
Life insurance isn’t something any of us want to think about it—but, believe me, knowing that your loved ones will be covered is a peace of mind that’s great to have.