Employer life insurance is usually not enough

Group life insurance is a common workplace benefit. Since it is usually free, there is no reason to turn it down. But before you decide that's all you need, you should understand what you are actually getting.

It's important not to count on group life as your main source of life insurance, says Belinda Hutchinson, CLU, Financial Services Represen-tative at ColinaImperial Insurance Company. Most group life policies, whether you pay for them or not, don't offer enough coverage for your beneficiaries.

In many instances, the amount of coverage the company gives is based on your salary, says Hutchinson. That percentage is normally one, one and half or two times your annual earnings. This level of coverage, however, would fail to provide complete financial protection if the key breadwinner in a family dies.

If for instance your annual salary is $30,000, your employer life insurance coverage would only be $45,000 (based on 1.5 percent). This amount is not nearly enough, she says.

Insurance professional's general rule of thumb used is based on the idea that a typical family (defined as a husband, wife and no more than three children) will require approximately 70 percent of an insured individual's salary for seven years before they adjust to the financial loss of income. Accordingly, multiply the insured individual's current gross salary by seven and then take this result by .70 (70 percent) to arrive at the estimated need.

Although the calculation may seem complicated it is pretty basic. For example: $50,000 current salary x 7 = $350,000 x .70 = $245,000 estimated insurance need.

The family may need more insurance if there are more than three children, above average family debt, or if any member of the family suffers from poor health. Converse-ly, if the family has two or fewer children, the insurance need may be less.


Think "supplement"


"Perhaps the biggest drawback to group life is when you leave your job, you'll probably lose the coverage. Worse, when you leave your job, you might have trouble buying life insurance elsewhere if you've developed a severe health problem," Hutchinson continues.

You may decide that the insurance coverage you have through your employer is adequate by itself. But you should keep in mind that this coverage may not be permanent. When you are no longer employed, you are no longer covered through the group plan. So you need to consider what your total insurance needs are and then you can decide whether you need personal life insurance, group life insurance, or both.

Build your financial plan around personal life insurance that you buy on your own and can control. Then your group coverage can be used to add to your personal coverage and help meet your total insurance needs. You should review your plans regularly and consider your current needs in light of job changes or other things that affect your group coverage.


What is the best supplemental alternative?


There are two basic types of life insurance: term life insurance, which provides life insurance coverage for a specified period of time (the term), and cash value (permanent) life insurance, which combines a death benefit with a cash value component. Cash value insurance offers lifetime protection, while term insurance may be the most affordable option if you're buying life insurance mainly for the financial protection it offers, and your need for life insurance is temporary (until your children leave the nest, for instance).


Remember...

If you've been putting off purchasing life insurance because you don't want to pay the premiums, you may be doing yourself a disservice in the long run. The younger you are when you purchase life insurance, the lower your premiums will be.

If you are considering supplemental life insurance or life coverage in general, compare quotes from several companies. And remember, any policy that you buy is only as good as the company that issues it. Find out what rating the company has received from major ratings services, such as A. M. Best or Standard & Poor's. These companies evaluate an insurer's financial condition and claims-paying ability. The company giving you a quote should provide you with this information.

Buying life insurance is an easy way to protect your family after you're gone. If you know what to look for, you can get great coverage at a price you can afford.

Comments and or questions are welcomed: info@cfal.com