Employer life insurance

Why your group life insurance may not be enough

Group life insurance is the life insurance you typically get from your employer through work.

Many people have at least some life insurance coverage as part of their employee benefits plan. In most cases, group life insurance gives you coverage that’s 1x to 2x your annual salary (which may seem like a pretty sweet deal).

Unfortunately, group life insurance rarely provides enough coverage to protect your loved ones.

If you’re single with no dependents, a sum valued at 1x to 2x times your salary is a big chunk of change. In fact, it’s more than we recommend for our users (more on this here). But if you have a partner and kids or debts, it usually isn’t enough. So if you fall into this category and you’re coasting on group life insurance coverage, you should find out whether it’s sufficient. Like coming home to a $3000 cell phone bill after a vacation, this isn’t the kind of surprise you want to have down the road.

Your family’s annual expenses won’t decrease by 50% if you die, not even close.

Let’s take a look at how your family’s expenses will change if you’re no longer around. (We know it isn’t the most uplifting exercise, but humour us so we can illustrate our key point.)

Let’s start by considering your housing expenses, such as your mortgage payment, property tax, utilities, cable, and WiFi. It’s unlikely that your family will be able to cut down on these expenses if you were to pass. After all, you can’t ask your cable company for a half portion of your Internet plan. Because these expenses don’t change much depending on the number of people in your household, we call them “fixed expenses.” You may not realize it (or maybe you just don’t want to think about it), but fixed expenses make up more than 30% of your monthly expenses! This means at least 30% of your family’s monthly expenses will remain the same after you pass.

We know what you’re thinking: “That still leaves 60%. What are those expenses for?” If your family is like most families, you probably spend this piece of the pie on food, transportation, clothing, personal care, and other discretionary expenses (like a beach vacation, designer heels, or unnecessary-but-oh-so-tasty weekly smoothies). Most of these expenses will drop with one fewer person in the house, but they won’t disappear completely. We estimate that about 60% or more of these expenses will remain for families left with a single income.

When you put all of this together, you can see that your family will still have to cover 60%–70% of your monthly expenses after you pass.

And unless your kid is bringing in the dough as a child movie star, your family will be paying these expenses while relying on a single income.

Because of this, one or two years of income replacement probably won’t be enough to allow your family to maintain their lifestyle.

Not convinced? Think about it this way: 1x to 2x your salary is only one or two years for your family to adjust to a single-income salary. What about the house you bought when you thought two people would be contributing to the payments? And what about all the other lifestyle perks your family has become accustomed to—the vacations, after-school sports, restaurant meals, and outings?

Are there some cases where your group life insurance may cut it?

Yes. If your spouse or partner has a large income and you’ve both managed to save a lot for retirement, you may not need a huge amount of life insurance protection. So there are certainly situations where families can adjust to a single income without needing much life insurance protection.

In any case, here’s the moral of the story: make sure you get the right advice on how much protection you need.

Find out more about our new approach to giving life insurance advice (read about it here).

At PolicyMe, we use a proprietary life insurance checkup that assesses your needs today and every year in the future. We then analyze your coverage patterns to find you the most cost-effective way to give your family the protection they need.

So how much does life insurance really cost? More on that here.

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