Do I need my own life insurance if I already have life insurance through work?

Question

My employer offers discounted life insurance as an employee benefit. I pay $70 per year for about $200,000 of coverage. Buying comparable coverage outside of work would cost me about $300-$400 per year at my current age/health status.

I understand that if I leave the company for any reason, such as taking a new job or being fired or laid off, I instantly lose this life insurance. Additionally, the older or sicker I am, the harder and more expensive it would be to get affordable life insurance.

I have a spouse who currently works and kids under age 10. Is there a strong case for purchasing my own term life policy in addition to (or instead of) what my employer offers?

Answer 1

Step 1: Determine if you need coverage for you.
Step 2: Determine if you need coverage for your spouse
Step 3: Calculate your coverage requirements:
- Amount of coverage
- length of time you will need coverage
- how long the money needs to last.

When determining these requirements don't forget the basic cost of living; also include money to pay off a house, or to pay for the education of children.

Now determine the sources of this insurance. Yes you can take advantage of insurance offered by your employer. Some provide free coverage for 1x your pay, or a set amount. Some offer the ability to buy coverage in multiples of your salary. I have seen up to 6X coverage, but it likely varies. Some also offer coverage for a spouse but those rules are different: they may be only for a set amount.

There are benefits to purchasing coverage through your employer. There generally is no requirement for a physical. The decision is annual, so you could decide to drop the coverage if the coverage is no longer need, or you can decide to increase it.

There are some cautions. Some programs only waive the physical if the coverage is under a certain amount, or if you hadn't waived the insurance in a previous year. You need to understand what happens if you leave the company, or if you become disabled. The costs could change, or even the coverage could go away.

Purchasing term insurance from an insurance company not related to your employer has some benefits: it can be purchased for 5, 10, 15 up to 30 years. The physical is only required when you purchase the policy. If you change employers you don't have to get a new policy. Also an employer could drop a benefit. Many term policies have options to extend the policy or covert it to whole/Universal life if you don't think you can pass a physical if you need insurance at the end of the term. The advice is to avoid "permanent" insurance but the conversion option might be important for some situations.

Purchasing a policy with a long term can also be more expensive. In the early years your rates are higher than they would be with a shorter term, so that in the later years you still have the coverage you need without an increase in rates. It becomes expensive if every few years you cancel a 30 year policy becasue you want to switch companies, or you want to change the insurance amount. You keep paying for the expensive years.

Answer 2

The rule of thumb for life insurance is to have 10 times your income if you have people that depend on your income. 10 times let your beneficiary invest the insurance at relatively safe return levels and will last many years. With kids under 10, $200K is probably not enough to support them if you pass.

Shop around for 10- or 15-year term insurance to get you closer to 10X your salary. After 10 or 15 years, you can reassess your needs based on if kids are still dependent on you, and how much retirement savings you have (which can be used in place of life insurance).

Don't mess with whole or universal. They are typically sold as investments combined with insurance, but the amount you pay above what equivalent term insurance costs usually has a bad return as an investment.

Answer 3

If you think your current life insurance coverage is not sufficient, you buy additional term life insurance. There is no reason replace your employment benefit with a a higher rate for the same insurance benefit. If your employment situation changes, you are always free to buy term insurance then.

Answer 4

In addition to the recommendations by DStanley, consider getting a term life mortgage insurance policy if you own a home with your spouse as the beneficiary. These policies have a level premium for n years (typically 15 to 30 years) and a death benefit that reduces approximately as the remaining mortgage balance declines over the n years. Once upon a time, and perhaps even now, typical mortgages had clauses to the effect that in case of any changes in the financial situation of the family (e.g. the primary breadwinner dying) that would cause the lender jitters, the principal would be due immediately. So, having a mortgage insurance policy ensures that the grieving surviving spouse has one fewer matter to be hassled about. Besides, not having a monthly mortgage payment anymore is effectively additional disposable income for your spouse.

Note that this policy is different from the quite expensive policy that a lender will sell you (or even insist upon selling you if your downpayment was smaller than what the lender considers adequate) for which the beneficiary is the lender, and if you have been making extra payments towards your mortgage, the lender will make a little extra profit off of you.