As benefits season kicks off, you may be focused on the changes to your health plan. But be sure to pay careful attention to your life insurance options when you fill out your annual enrollment forms.
That is because the typical U.S. company usually only offers one- to three-times salary as a life insurance benefit at no cost to workers, and it ends when you leave the job.
Still, this is all many people have. Only 70 percent of Americans – some 87 million households – have any kind of life insurance coverage, according to the new 2016 survey by life insurance research group LIMRA. Nearly half of those surveyed by LIMRA have only group policies, with an average coverage of $236,000, or 2.6-times income replacement.
“If you’re 26, with no student debt, on your own with no family, then maybe one-times your salary is sufficient,” says Anita Potter, assistant vice president for LIMRA.
The industry recommendation from LIMRA is to have more than double that, and some financial experts recommend even more.
“The old rule of thumb used to be 10-times income, but with today’s markets and lower interest rates, you need closer to 15- or 20-times,” says Marvin Feldman, president and CEO of Life Happens, a non-profit group formed by seven insurance producer organizations.
The first place to level up may be at your own company. About 70 percent of workplaces offer additional optional coverage, and about 40 percent of employees take them up on it, LIMRA says.
The key benefit of increasing your coverage this way: Group benefits usually require little underwriting, which means no doctor notes or health restrictions. You may also be able to take that additional coverage with you when you change jobs, Feldman says.
Buying company coverage is “a nice way to get the conversation started,” says Sean Scaturro, a financial adviser for USAA, the financial services company that caters to a military clientele.
Scaturro uses the acronym “LIFE” to remember what individuals need to consider: liabilities, income for survivors, final expenses and education costs for survivors. Online calculators are available to do the math for you, like the one at Life Happens (http://lifehap.pn/1icrq0n).
Financial advisers or life insurance brokers can help walk you through the various policy types.
Most people would do best with simple term life policies, Scaturro says. These charge a low monthly premium, which could be under $50 a month for a person under 55, for a fixed period like 10 or 20 years. Term policies do not pay out any benefits if the person does not die.
There are also more complicated policy types that offer investment options and that you can take loans against, but many advisers warn against them for basic life insurance needs.
“We need to stop thinking of life insurance as a Swiss army knife,” Scaturro says. “It was designed to provide cash for loved ones if you die. Those that flirt with investment become complicated.”
The biggest hurdle of getting people to have adequate coverage is that workplace insurance provides “a false sense of security,” Feldman says.
People typically need to be scared into it or tugged by the heartstrings. It often takes a bad experience with a family member or close friend to motivate someone to get serious about life insurance. Or the story of somebody famous.
This year’s face of life insurance meets both of those requirements. Race car driver Danica Patrick, who is a spokeswoman for Life Happens, obviously needs to protect herself because of her risky job, but she also comes from a family that was nearly destitute in the past because of the untimely deaths of both of her grandfathers, neither of whom had life insurance. Her parents drilled into her the importance of proper coverage.
“I hope people hear my story and are reminded of just how random and unpredictable life can be,” Patrick said in an emailed statement to Reuters. “Bad things can happen. That’s just life. But life insurance is an easy and smart way to lessen the impact and protect loved ones.”