If you feel lost during open enrollment for your benefits, you are not alone. Many people struggle with the options thrown at them — specifically the life insurance options — and worry that they are not making the right decisions. The number of people I see who blindly waive life insurance options without even exploring what they cover, or asking themselves if they might eventually need that coverage, is concerning.
Before you decide whether or not to elect a life insurance policy, familiarize yourself with this important benefit. In part one of this three-part “Beginner’s Guide to Life Insurance” series, we look at the common uses for life insurance, types of coverage — including the differences between work and individual coverage — and how to obtain life insurance.
Common Uses for Life Insurance
Life insurance can be used to cover a number of expenses for your beneficiaries. Some of the more common ways these policy payouts are used include:
- Final expenses: The average cost of a typical funeral in the United States is between $8,000 and $10,000.
- Income replacement: If your income is necessary for some or all of your household costs, income replacement ensures that your family can maintain their current standard of living after you pass.
- Debt repayment: If you have a mortgage or any other type of debt, the payout from life insurance either enables your beneficiaries to keep that asset (such as a house or a car), or provides them with enough time to sell it.
- College expenses: Currently, the average cost of tuition, room, and board in the United States ranges from $24,061 for an in-state public college, to $38,544 for an out-of-state public college, to $47,831 for a private college.
- Transfer of a business: The legal costs of transferring a business to a family member or third party fall on the deceased executor if the deceased had sole ownership.
- Estate tax liability: Before an inheritance is passed along to heirs, a tax is levied on the net value of the estate if the valuation is above a certain threshold.
Types of Coverage
There are many types of life insurance policies. Annually renewable term insurance is typically the group coverage option offered by an employer. In this type of policy, you must enroll each year, and the price can change each time you re-enroll. For individual policies, you can buy term insurance that lasts for a specific period of time, usually 10, 20, or 30 years. This coverage is in effect for that period and then goes away when the term ends. Other types of coverage — whole life, guaranteed universal life, variable universal life and indexed universal life — last potentially to age 121, and some build cash values. A trusted advisor will be able to give you a more in-depth overview of the different types of coverage, and can recommend the one that is most appropriate for you based on your budget, length of coverage desired, and risk tolerance.
Important Differences Between Work and Individual Coverage
Many employers will provide a base amount of group life insurance at no cost, with the option to elect additional group coverage for an additional fee. If you have a health consideration that would prevent you from obtaining an individual life insurance policy, electing this supplemental group term coverage may be your only option. If you do not have insurability concerns, consider obtaining an individual life insurance policy outside of your employer that you will own and can control (in terms of length of coverage). Most group policies do not transfer from employer to employer, so relying solely on group coverage can leave you unexpectedly uninsured if you move to a new company that does not offer group coverage.
Where to Obtain Coverage
In order to receive the most unbiased recommendations on life insurance, I recommend working with an agent who represents more than just one or two companies. Many agents are tied to one company, and will not provide you with enough information to compare quotes adequately. Some Certified Financial Planners™ also act as life insurance agents and must adhere to a fiduciary standard which mandates that the advisor must act in the best interest of his or her client.
Advisory services offered through Investment Advisors, a division of ProEquities Inc., A Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member FINRA & SIPC. Stable Waters Financial is independent of ProEquities, Inc.
Katie Waters is a member of the DailyWorth Connect Program. Read more about the program here.