Life Insurance Planning
By Eva Stark, JD, LL.M.
Many people, especially younger individuals or those with convenient access to employer-provided group term life insurance, may rely solely on such insurance for their protection needs. Reliance exclusively on employer-provided life insurance to meet one's specific needs and circumstances, however, can be risky for a variety of reasons:
- The benefit amount may be too low;
- Coverage is typically lost with an employment change; and
- The cost of coverage may be higher than could be obtained on an individual basis.
COVERAGE AMOUNTS MAY BE TOO LOW. Many employers provide group term insurance to their employees as an employee benefit, but the amount of coverage provided varies greatly by employer and may be insufficient for individual needs. Employers may provide policies with a fixed death benefit amount to each employee, such as $50,000, or they may provide coverage based on a multiple of the employee's salary, such as a death benefit equal to one, three or five times an employee's annual compensation.
Depending on individual circumstances, such one-size-fits-all group term insurance may or may not be enough. While a group policy may be sufficient for a single person with no dependents, it may be woefully insufficient for a primary income earner with a stay-at-home spouse, parents with dependent children, and/or individuals with disabled family members or elderly parents to support.
COVERAGE MAY BE EASILY LOST. Employer-provided term coverage may be easily lost if employment stops, which can happen involuntarily (e.g., a reduction in work force or termination by the employer), voluntarily (the employee changing jobs), or upon retirement. A job loss or job change may therefore leave a family with no protection in the event of a premature death.
Even if new employment is found quickly, the new employer may provide substantially less coverage than the previous employer (or no coverage at all). This could leave an employee scrambling to obtain additional insurance that he or she previously assumed could be relied upon. The additional insurance need also may arise after a change in the employee’s health, which could make obtaining additional coverage more difficult, more costly, or simply not possible, depending on the specific health issue.
COSTS MAY BE TOO HIGH. Some people also may be overpaying for employer-provided life insurance. While employer-provided life insurance can be convenient and often does not require a medical exam (and some coverage may even be provided at no cost to the employee), the convenience of employer-provided life insurance can also come at a cost in some cases. After all, group term insurance must cover every employee, regardless of age or health status. This could mean that some employees, especially those who are younger, healthier, or non-smokers, could pay less for the same or more coverage by obtaining individual life insurance.
Coverage Amount Considerations
To determine the amount of coverage that should be considered, it will be important to analyze an individual's financial circumstances and goals. For example, consider:
- How much cash would the family need if a death occurred to pay medical costs, funeral expenses, or estate administration costs?
- What outstanding debts does the individual have (e.g., mortgages, auto loans, credit card balances)?
- Does the individual intend to provide for his or her children's educations? How large of an education fund would be needed?
- How much will be needed to support the surviving spouse in his or her accustomed manner of living? Will the survivor seek employment, and if so, how much will he or she earn? For how long will he or she continue to work? When is he or she hoping to retire?
- For how long is coverage needed? Ten years? Twenty years? Permanently?
- Are there other assets or income sources that could continue to provide support for survivors after the main breadwinner's death (e.g., rental income, dividends, pensions, etc.)?
The loss of a loved one is extremely difficult even without the financial problems that tend to follow. Having enough coverage can ensure that debt levels remain manageable and that lifestyles or children's educations are not compromised if the unthinkable happens.
An insurance or financial professional can help evaluate whether employer-provided life insurance is sufficient and whether individual life insurance might make sense in addition to or in lieu of employer-provided insurance.
Eva Stark, JD, LL.M.,joined The Nautilus Group® in 2014 to assist with the development of estate and business plans. She also performs advanced tax research. Eva graduated summa cum laude with a BS in economics and finance from The University of Texas at Dallas. She earned her JD, with honors, from Southern Methodist University, where she served as a student attorney and chief counsel at the SMU Federal Taxpayers Clinic. She received her LL.M. in taxation from Georgetown University Law Center. Prior to joining Nautilus, Eva worked in private practice in tax controversy, business law, and litigation.
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