Unless you have kids, as a successful, young professional, you’ve probably not given much thought to life insurance. You probably know that your employer provides group life insurance. You don’t pay for it. So, it may not really mean all that much to you. Perhaps your parents gave you a life insurance policy that they took out for you when you were a kid. But it’s small and you may not even be sure where the actual policy is.
But should you be thinking about life insurance? Well, actually, yes, you should. If you have debts (e.g. student loans or a mortgage), life insurance can pay them off if you die prematurely. If you want to leave behind a bit of an estate (for bequests to family, charity, etc.) and you haven’t yet built your own wealth, life insurance is the perfect way to do that. If you’re married and/or have kids, then life insurance makes even more sense. In fact, it’s probably essential.
Basic Group Life Insurance
Your employer will typically provide basic group life insurance as a multiple of your salary (e.g. 1-2x your base salary). So, if your salary is $150,000 and your employer provides 2x salary, you have $300,000 of basic term life insurance. That’s a nice benefit and it may be quite adequate if you are single, have little or no debt and don’t wish to leave behind a larger estate.
You don’t have to go through medical underwriting to qualify for group life insurance. This is convenient and potentially extremely valuable if you have some kind of health condition that could impact underwriting by the insurer.
This basic group life insurance is term life insurance. This means that it’s a pure death benefit and has no cash value. Also, it’s not portable which means that if you leave your employer, the coverage ends.
Basic group life insurance provided by your employer is typically free. But did you know that it’s probably taxable to you? The Internal Revenue Service rules say that employer-provided life insurance with a death benefit in excess of $50,000 is taxable to the employee. The amount over $50,000 is consider imputed income and it’s taxed based on a federal premium table. The tax is calculated on the amount of life insurance and your age. You can find the table in IRS Publication 15-B.
Supplemental Group Life Insurance
Let’s imagine that you need more life insurance than the basic coverage and your employer offers supplemental group life insurance. Should you buy it? Probably not.
Supplemental group life insurance through your employer will likely be more expensive than the life insurance you can purchase on your own in the market. Also, like your basic group life insurance, supplemental group life insurance is (probably) not portable. If you leave your employer, the supplemental coverage ends.
So, when should you buy supplemental group life insurance through your employer? When you’re unable to medically qualify for competitively-priced private life insurance. The group life insurance may be less expensive than an individually-underwritten term life insurance policy.
How Much Life Insurance?
How do you figure out how much life insurance you need? There are a variety of ways to calculate the amount of life insurance you should carry. The “multiple of income” approach multiplies your income by the number of years you wish to replace it. So, if you earn $150,000 and wish to cover 10 years of income, then you would purchase a $1,500,000 policy. This is a fairly simplistic need assessment.
The “human life value” approach considers your economic value and the financial loss that would result if you were to die prematurely. It considers factors such as your current age, the coverage period, your income, taxes, inflation, and a discount rate. While this is certainly an improvement over the “multiple of income” approach, it’s still a bit rough.
The “capital needs analysis” is a much more robust approach and it is the most-widely used method to determine how much life insurance you need. It factors in income needs, an inflation-adjusted return, immediate cash needs at death, future spending needs, and existing resources.
There are many life insurance needs calculators on the internet. Some are more robust than others. But most are pretty basic, require minimal input and, therefore, aren’t entirely reliable.
The best approach to determine how much life insurance you need is to work with a trained professional who will have specialized software that can more precisely determine your insurance need. An experienced CERTIFIED FINANCIAL PLANNER™ (CFP®) or Chartered Life Underwriter® (CLU®) can take you through the process.
How Long Will You Need Your Life Insurance?
Once you know how much life insurance you need, the next issue is to determine how long you’ll need it. It’s entirely possible that you won’t need the full amount you need today for the rest of your life. For example, if you’re married, have young children and your spouse isn’t working, you’ll need more life insurance today than you will once your kids are grown and financially independent, and your spouse returns to the workforce. This leads us to our next decision point.
What Kind of Life Insurance?
If your need for life insurance is temporary, you should purchase term life insurance. If your need is long-term or permanent, you should purchase some form of permanent (or cash value-based) life insurance.
So, let’s imagine that you need $3 million of life insurance today, but that $1.5 million of that need will end once your kids are on their own, in 20 years. You could purchase $1.5 million of 20-year level-premium term life insurance, and $1.5 million of permanent life insurance that will remain in-force the rest of your life.
There are many forms of permanent life insurance, including whole life insurance, universal life insurance, variable insurance and variable universal life insurance.
Do you have questions about insurance, investing, or building a solid plan for your financial future? Contact us today to see how our team at Springwater Wealth can help you.
How to Buy Life Insurance
It’s not very difficult to purchase term life insurance. You can do it online or through your local insurance agent. But do your homework and make sure you buy the policy from a well-rated insurance company.
Purchasing permanent life insurance is much more complicated. So, if you have a need for it, you should work with a life insurance expert, such as a CLU®. You could also work with a life insurance broker, or a career agent with one of the major life insurance companies that are highly-rated.
As a young professional, life insurance will be an important part of your comprehensive financial plan. Take the time to figure how much you need, how long you’ll need it, and the most appropriate products to meet your need. Then take action and get the coverage from a highly-regarded life insurance company.