An Employer Life Insurance Policy May Not Be Enough
How Much Life Insurance Do You Need?
When James’ daughter was born, his employer’s benefits packet sat in a drawer for almost a year before he opened it. Inside, he found a line item he’d never paid much attention to: group life insurance. It was provided automatically through his job and covered one year’s salary.
James, a 34-year-old operations manager in Connecticut assumed that number was enough. It was not until a coworker’s family struggled financially after an unexpected loss that James sat down and did the math on his own household. What he found surprised him.
James is far from alone in leaning on a number he never chose. Most employer-sponsored life insurance policies provide a death benefit of only one or two times an employee’s annual salary, an amount that rarely comes close to covering a family’s actual financial needs.
It also often disappears the moment someone changes jobs, which matters more than it may seem, since many workers change employers multiple times throughout their career. For families relying on workplace coverage as their only safety net, that combination of a modest benefit and a fragile one deserves a second look.
Start With What You Would Need to Replace
There is no universal number that fits every household, but there is a reliable starting exercise.
Add up several years of income the family would need replaced, typically 5 to 10 years depending on the ages of any children, the remaining balance on a mortgage, other outstanding debts such as auto loans or credit cards, and the anticipated cost of raising and educating children through college. From that total, subtract existing savings, retirement accounts earmarked for the family, and any coverage already in place, including workplace benefits.
Some financial professionals use shorthand rules, such as coverage equal to 10 times annual income, as a quick starting benchmark before a more detailed review. These rules can be a useful gut check, but they rarely account for a family’s specific circumstances like a spouse who does not work outside the home, a child with special needs, or a mortgage that will be paid off in 5 years rather than 25. This rule of thumb is a starting point for a conversation, not a substitute for one.
Why Employer Life Insurance Coverage Falls Short
Group life insurance through an employer can have real value, and it should be counted as part of a family’s overall picture. However, it may not be enough on its own.
Coverage amounts are typically capped well below what a family actually needs, and because the policy belongs to the employer rather than the individual, it often doesn’t continue after termination. Some employer policies do have a portability option to transfer coverage, but it is uncommon. This can create gaps in coverage as careers and circumstance changes.
Planning Coverage Through Life Changes
The right amount of coverage at age 28, with a new mortgage and a first child on the way, is rarely the right amount at age 45, when a mortgage balance has shrunk and a child is approaching college. Coverage needs generally build through the early and middle years of raising a family, then decline as debts are paid down, as savings accumulate, and as children become financially independent. This is one of the reasons a financial professional will typically ask about the full arc of a family’s plans, not just the current year’s budget, before recommending a coverage amount.
“Families often come to me focused on a single number they have heard somewhere, when the more useful question is what that number actually needs to accomplish for their household,” says Natalia Walker, Vice President of Investments at David Lerner Associates.
“Once we walk through income, family needs, and the years ahead, the right coverage amount usually becomes much clearer, and it is often different from what people expected going in.”
Putting the Math into Practice
James eventually sat down with an Investment Counselor and worked through his own numbers: his salary, his mortgage balance, his daughter’s projected education costs, and the one-time salary benefit he already had through work. The gap was larger than he expected, and he closed it with a term policy sized to carry his family through his daughter’s college years. The exercise took less than an hour, and it replaced a guess with a plan.
That is ultimately what a coverage review can offer. Not a single magic number, but a clear picture of what a family would actually need to replace, matched against what they already have. For most families, that comparison is worth making sooner rather than later, since the cost of coverage tends to rise with age and any change in health.
Material contained in this article is provided for information purposes only. It is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. These materials are provided for general information and educational purposes, based on publicly available information from sources believed to be reliable. We cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. The subject of this article is fictitious and created for illustrative purposes only. It is based on events of a similar nature and should not be interpreted as a direct depiction of any specific individual, organization, or incident. Any resemblance to actual persons, living or deceased, or actual events is purely coincidental.