Do you have life insurance?
Life insurance is an important part of any financial plan, as it provides needed funds should your spouse pass away.
It's tough to think about, but imagine if your spouse were to suddenly perish in an accident. Say they were the breadwinner in the family. What would this mean for you and your children?
Would it mean that you'd have to go back to work to support your family? Would it mean that you'd have to put your children into daycare? Would it mean you'd have to sell the house because you could no longer afford the mortgage?
These are just a few of the devastating financial possibilities that can occur upon the death of your spouse.
One could easily reverse the scenario and imagine if you passed away to leave your family to fend for themselves. That is probably the more frightening thought.
It's easy to see why life insurance is so important in the midst of such a tragic event. I come back to my question: Do you have life insurance?
If you do, that's great. But are you making the number one mistake that many people make when it comes to their life insurance policy?
Too many people rely on their employer-sponsored life insurance. This, is the number one mistake. Why? Many people can't take their life insurance policy with them if they quit or get fired from their job.
That's a problem because those who solely obtain life insurance through their employer may not think to get life insurance again after they switch jobs.
Marvin H. Feldman, President and CEO of LifeHappens.org tells us:
“Employer provided group life insurance is an excellent benefit, but its major drawback is that when you leave your employer for another opportunity, you leave this benefit behind. Your new employer may or may not provide the same level of benefit or perhaps none at all.
Your need for the life insurance does not go away just because you changed or lost a job, so it is important you have personally owned life insurance that stays with you when you make these changes. Your financial obligations don’t change, only your job.”
A Life Insurance Case Study
Some couples, however, are smart and obtain life third-party life insurance in addition to their employer-sponsored plan. And for many, it may even make sense to drop employer-sponsored plans altogether and opt for third-party coverage.
I worked with one couple who did just that. The husband was paying $24.96 per month for $284,928 in coverage through his employer. They also had a third-party term plan on him that was $30.42 per month for $500,000 in coverage.
This amounted to $55.38 per month for $784,928 in coverage for the husband.
The wife was paying $29.29 per month for $403,872 in coverage through her employer. They also had a third-party term plan on her that was $12.92 per month for $150,000 in coverage.
This amounted to $42.21 per month for $553,872 in coverage for the wife.
This couple was in their 30s and I knew they could do better than that. I helped them explore their options and found insurance that gave them more for their money – and they were able to drop their employer-sponsored plans, too.
The husband now pays $58.29 per month for a new policy with $1,000,000 in coverage. The wife now pays $35.89 per month for $750,000 in coverage.
In aggregate, they now pay $94.18 per month for $1,750,000 in coverage versus $97.59 per month for $1,338,800 in coverage.
That's right, they're paying less for more coverage. And, if they decide to change jobs, they won't have to lift a finger to ensure they're still covered. Their term life insurance policies will follow them regardless of their employer.
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I recommend term life insurance because it's so cheap and provides an amazing value. Whole (permanent) life policies rarely make sense. If you want to invest, invest directly into the stock market through a financial advisor. Don't invest within a life insurance policy.
Tim Maurer, a contributor for Forbes, writes:
. . . the “investment” feature in a permanent life policy is rarely as effective or efficient as several others, like your 401k, IRA or Roth IRA, so fill those buckets first.
While it's important to have life insurance you can take with you wherever you go, it's not the only reason I recommend considering getting out of an employer-sponsored plan and getting term life insurance through a third party.
Here are some other important reasons to get life insurance without the help of your employer:
1. You could save money through a third party.
The couple in my case study actually saved money by exploring their options and taking action. You can too. This could save you quite a bit of money over the long-term.
Listen, no one likes paying insurance premiums – I get that. Nevertheless, life insurance is an important piece of insurance because it helps families in the event of a death. If you see the value in having this coverage, make sure you obtain coverage but at the cheapest rate possible.
There's no need to pay for expensive life insurance through your employer if you can find cheap term life insurance elsewhere. You could even invest the difference you save and make even more money on your savings. This is also a great idea when switching from a whole life insurance policy to a term life insurance policy.
Every little bit counts. Don't pay more than you must.
2. You could get more coverage with a third party.
Remember, not only did the couple in my case study save money, they got more coverage, too.
In fact, you may find your coverage options rather limited when you go through your employer to obtain life insurance. I've personally seen how friends sign up for their default employer-sponsored life insurance policy and don't realize that $10,000 in coverage just won't cut it. Sure, it's enough to bury someone upon death, but is it enough to take care of their family? No way.
Granted, some employers offer additional coverage for a fee. Just make sure you're getting the best bang for your buck.
3. You'll have an abundance of plans to choose from through a third party.
If your employer limits the number of options you have to choose from through your employer, why not explore plans outside of what your employer offers?
For example, you can find plans available in 10-, 20-, or 30-year terms. Choose the amount of time you think you would need to be covered (at least until you're financially secure).
You'll also want to choose the amount of coverage you feel comfortable with. A good rule of thumb is to have at least 10 times your income in coverage. However, you need to choose an amount that is right for your specific situation.
How to Start Third Party Term Life Insurance
Thankfully, it doesn't take much time to get a quote for third party term life insurance. You can find websites online that sell life insurance and compare plans side by side.
Once you get a quote and start the purchase process, you'll probably have to have a minor medical exam either at your local doctor's office or with a medical professional who visits your home.
Some plans allow you to pay on a monthly or annual basis. There's a plan for every budget.
Also, make sure to designate your beneficiaries and keep them up to date. Forbes staff writer Deborah L. Jacobs writes:
It’s crucial that you keep these forms up-to-date. To change a beneficiary – for example, if you get married or divorced or your spouse dies – make sure to file an amended form.
Don't be one of those who lose their coverage without knowing it. Secure your own cheap term life insurance and rest assured that you're covered – even if your employer gives you the boot!
This post originally appeared on Forbes.