If my husband and I have life and disability policies through our employers, is that sufficient? Both of us have very high coverage amounts, but neither of us has policies outside of work. If we ever left those jobs, voluntarily or otherwise, we’d have to replace our group coverage with personal policies then. Is that a solid strategy?
Diane, Indianapolis
Answer: You got one thing right – I am the type of person who has a strong opinion about group life and group disability insurance. It’s also worth noting how great it is that you value life insurance and disability insurance. Many people do not share your prudence. I also like that you’re thinking ahead in regards to how a job change might affect your benefits strategy.
I’m clearly building you up because you’re about to learn why you need to restructure your entire plan.
Group life and group disability benefits are fantastic. They are generally cheap, easily attainable, and wonderful when you have an insurability issue. However, they should not be used in place of policies you can buy outside of the workplace, especially when it comes to life insurance.
The latest number I could find from the Bureau of Labor Statistics suggests you, and every other American will hold roughly 11 different jobs in your lifetime. This means you will likely have jobs with good benefits and jobs with bad benefits. And just because your current gig allows you to amass large amounts of life and disability insurance coverage, doesn’t mean your next job will.
This is precisely why you should buy your coverage outside of work, and only use group policies to supplement your coverage for cheap. Is it more expensive to do it this way? Yes, but life insurance is about buying the right to transfer risk to another entity. When your entire insurance strategy is predicated on staying at your current job, then you’re taking-on additional unnecessary risks.
Both life and disability insurance are the cheapest when you’re young and healthy. And while some people are able to improve their overall health as they get older, no one has figured out to stop the clock on aging (as far as insurance underwriters are concerned). My big fear for you is that everything goes wonderfully for you for a very long time, and then it doesn’t. At the point it stops going so well, you might be much older and much less healthy. Therefore coverage might either be prohibitively expensive, or you may not qualify for coverage at all.
Please believe me, I’m not fear-mongering. I’ve witnessed this awful reality several times over the years.
The best way to prevent this from happening to you is to purchase the proper amount of coverage outside of work. With life insurance, your work coverage will be very cheap gravy which would go a long way in providing for your family in the event of your death. Some people choose to purchase permanent coverage as their primary coverage, and then let the group insurance, which is term coverage, fall-off over time.
Some people choose term life insurance as their primary coverage for three reasons, which often all happen at the same time. First, it’s tremendously less expensive than permanent coverage. Second, you can purchase a lot more of it for the price. It’s very important to have the right amount of coverage, as most people have too little. The final reason people choose term is that it’s part of their overall financial plan. In this instance, the goal is to build assets and repeatable retirement income, throughout your career, thus creating a layer of self-insurance at retirement.
With disability insurance, your personal coverage will actually wrap around your group coverage. If you’re trying to be as comprehensive in your planning as possible, do not ignore the need for supplemental disability insurance.
Diane, call your insurance agent and restructure your plan sooner rather than later. You will absolutely spend more money than you’re spending on your current plan, but part of the pain from that comes with having utilized a suboptimal strategy for years. As long as you’re still relatively healthy, changing your strategy will be the permanent fix you need when it comes to this not-so-fun area of your financial plan.
