When it comes to life insurance, people either turn to whatever policy they are offered by a salesperson, or they rely on their employers to provide the life coverage they need.
If you are like most people, you probably go the second route, relying on your employer’s policy.
Many companies and employers provide some amount of life insurance for their workers, with an option to purchase extra coverage for themselves and their spouses at low cost. But is this form of life insurance enough for you and your family?
A Quick Fact Check
First of all, company coverage has some merits to it. For example, according to the Affordable Care Act—for the time being—you do not need a medical exam to qualify for these policies. That means you cannot be barred from being a beneficiary of these company-provided life insurance policies because of your age or health. That is not the case with individual policies.
Another benefit of these life insurance policies is the fact that the premiums come straight out of your paycheck rather than from your pocket. Payment is automatic, so you neither miss the money nor have to worry about paying the bill.
Typically, these employers’ policies will provide coverage equal to or double the employee’s annual salary.
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Life insurance policies also have some benefits which are usually touted by whichever agent is trying to get you to sign. Often, salespeople will try to get you to sign up for a permanent plan, citing several benefits including:
- Premiums paid towards maintaining your permanent plan can be considered guaranteed savings.
- It’s a great coverage plan you can leave for your family in the event of your demise.
- If you stick with it till the end, it’s always going to be there, since it’s a permanent plan.
Or you may decide to go with a term policy instead. Whatever route you choose, there is always the chance of spending a ton of money and still leaving your family unprotected.
Here are 3 reasons why your life insurance policy is probably not enough:
1. LIFE INSURANCE COMPANIES DON’T TRY HARD ENOUGH TO FIND BENEFICIARIES
Insurance companies don’t try hard enough to seek out beneficiaries. Legally, they have to put some amount of effort into finding the beneficiary, but laws do not state how much they have to try. As a result, life insurance companies do not try that hard and hundreds people who should have receiving payments are not.
There are two ways of combating this. The first is to make sure that your insurance companies are always updated on the location and contact information of your beneficiaries. That is a lifelong task.
The second way to combat this is by having the payments go directly to something such as paying off a mortgage as explained by the folks at MeetFabric.com.
2. YOUR EMPLOYER MAY NOT OFFER ENOUGH LIFE INSURANCE
One of the most obvious benefits with employer provided life insurance is that it is either free or can be considered low cost. But, as with all goods that fall within this category the risks may far outweigh the money saved.
Your employer’s policy may provide coverage equal to or double your annual salary. And for a little extra you can purchase further coverage that amounts to four or five times your annual salary. But experts insist that is usually not enough.
“Most people are able to buy an additional four to six times their salary in supplemental coverage over and above what’s provided by their employer,” according to Brian Frederick, a Certified Financial Planner (CFP®) with Stillwater Financial Partners in Scottsdale, Arizona.
“While this amount is sufficient for some people, it isn’t enough for employees that have non-working spouses, a sizable mortgage, large families or special needs dependents.”
In personal finance, there is never a one-size-fits-all solution to individual problems. Take a look at your personal family situation and assess what you need.
Another drawback of these employee life policies has to do with the scope of the benefits they provide. According to Mitchell Barber, a financial services professional at the Center for Wealth Preservation, a Syosset, New York-based agency of MassMutual Financial Group,
“Death benefits that replace salary do not take into account bonuses, commissions, second incomes and the value of additional benefits such as medical insurance and retirement contributions.”
If you are single or have a spouse who is not directly dependent on your income for survival and you don’t have kids then these company-provided life insurance plans might be enough. But if this was the case then you probably don’t need a life insurance plan at all.
3. THE INSURANCE COVERAGE GETS TRICKY IF YOUR HEALTH DECLINES
Lots of things could go wrong with a company-provided insurance policy if your health suddenly starts failing.
According to Jim Saulnier, a CFP® with Jim Saulnier & Associates in Fort Collins, Colorado,
“If you rely solely or heavily upon group insurance, and then suffer a medical condition that forces you to leave your job, you may be losing your life insurance coverage just when your family is going to need it the most…. At that point it may be too late to purchase your own policy at an affordable rate, if at all, depending on the medical condition.”
Even if you can continue working with your failing health, you will find yourself chained to a job in order to keep the life insurance.
And despite all these risks, you can’t even decide who provides this insurance you so badly need. Your company could switch to a lower-rated provider anytime in order to save money. That could mean the insurance you paid for won’t be there for you when you actually need it.
Make sure you check the A.M Best rating of your company’s provider to make sure they can actually help you if you need them.
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Author: Bruno Souza