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.
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.
Here’s the moral of the story: make sure you get the right advice on how much protection you need.
This gives your family the option to use the money however they want to. Some people use it to pay off a mortgage. Others use it to continue making rent payments. And in many cases, people use life insurance to care for children, fund educational expenses, and cover day-to-day living costs.
How much does life insurance cost?
A 20-year, $500,000 term life insurance policy costs around $35/month for someone in their 30s. For a lot of people, that can be enough coverage to keep their families protected.
When is the best time to get life insurance?
The best time to get life insurance is when someone depends on you. For most people, this is when they get married or when they start having kids.
We know what you’re thinking: “But I just got a mortgage, and having kids isn’t cheap! How am I supposed to afford life insurance?"
Fortunately, the younger you are, the more affordable your life insurance will probably be. In most cases, it’s smart to lock in a low monthly rate when you’re young because it’ll stay at that price for the entire term of your policy.