Some of us are lucky enough to have careers or employers that provide a large life insurance policy while in their employment. I was lucky enough to have the SGLI while I served in the Army. These policies are known as Group Life Insurance Policies. What that basically means is the employer is covering the majority of the cost of life insurance for the employees and each employee gets to partake in the policy at a significantly reduced rate, or for no cost whatsoever sometimes. This sounds amazing right? Well, when planning for your family’s financial future, you may want to supplement your work coverage with a personally owned protection plan. Here are some reasons why.
You Do Not Own The Policy
Owners of group policies, the employer, control the policy. Therefore, employees on the plan do not receive a personal policy in the mail. Owner of the policy can change the policy, reduce the policy proceeds, increase payment amounts, even remove policies altogether. As an additional rider on a group policy, there is nothing you can do about this.
Let us review an example to further illustrate. Let’s say you have a mortgage for $199,000 and you have a group policy through work for $250,000. You may think you have all you need in coverage to protect that mortgage. However, your employer is having a tough year financially and must make cuts. They start with employee benefits before considering layoffs. The employer now drops every employee’s life insurance benefit to $100,000 to cut costs. Now, the coverage you thought you had you no longer have. This can, and has, happened before. In addition to this, if your employer lays off/fires you or you retire, you also lose the benefit amount.
Group Policies Barely Pay Out
You must know that life insurance companies are running a business, and a profitable one at that. Could a business thrive and grow if they were charging a few dollars for hundreds of thousands of dollars of life insurance protection AND they were paying out often? The answer is simply no. Group life policies have the most legal loopholes to prevent having to pay out when an employee passes away. This does not mean group policies never pay out, it just means that I have met countless clients that had a situation where a loved one or family member passed, and the benefit amount was not paid. Group policies are cheap for a reason, remember that.
Group Policies Often Don’t Cover Enough
Most group policies I have come across provide between 1.5 to 3 times the employees annual take home pay. In a few instances’ employers may supply more or less than those numbers. A great rule of thumb is to ensure you have seven times your annual pay for your family/loved ones to live off when you pass away. Planning ahead like this protects your family’s financial future when something happens to you. You may need to plan for more if you have children still in the home. An example would be:
Tony and Margaret have three children: Amy 11, Dennis 8 and Tyler 5. Tony is the primary income earner while Margaret stays home with the children. Tony Makes $75,000 a year take home, after taxes. His work supplies a life insurance policy for $300,000. Is that enough coverage? The answer is no. Tony should make sure he can provide the same standard of living for his entire family until all of the children are through high school at a minimum. That means he should cover $75,000 income for 13 years, or until Tyler is 18. At a minimum, Tony should have $975,000 of coverage for the next 13 years, so he is short about $675,000. That may seem like a lot, but Tony can find many different plans that can either build a retirement fund for him, as a dual purpose, or will return his money after the term, so he will not be out any money at the end. Can you see how important it is to appropriately plan for your family’s finances after you pass away?
Plan and Prepare to Take Care of your Family
It is not easy planning for the worst possible situation; however, it is extremely necessary. I come across families daily, literally, that are underinsured but falsely believe they have the best coverage in place. I write these articles to help educate families on the importance of getting properly protected. As always, if you have not already, you should speak with an advisor. You can reach out to me, and I will serve you and your family in the best way possible by using one of the life insurance quote tools here. Click here to read more articles about life insurance. Until next time!