How to Calculate If Your Employer’s Group Life Insurance is Enough

Group life insurance can be a fantastic workplace benefit because your employer provides you coverage for free or at low rates, which can set a good baseline of coverage for your loved ones. However, many employers only offer $50,000 of coverage because the IRS may consider any coverage above that to be taxable income on your tax return. This amount of coverage may be enough for some people, but not all. So, you may want to get a supplemental life insurance policy outside of work. This article will explain how to calculate your life insurance needs, then dive into some policy options if you need to buy more coverage in addition to your group life insurance policy.

How to calculate your life insurance needs

A good rule of thumb for calculating your life insurance needs is to multiply your income by 7 to 10. For example, if you earn $50,000 per year, you would need $500,000 of coverage to meet this rule. If you have a $50,000 group policy and don’t plan on leaving work anytime soon, you might want to get an additional $450,000 policy.

That said, your situation may require more coverage. For example, if you have a large and growing family, live in an area with a high cost of living, or have complex financial or estate planning needs, a higher death benefit may be necessary.

On the other hand, a couple may each earn high incomes, have moderate living expenses, and have no children. As a result, they may not need as much coverage. If one partner passes away, the other may be better able to replace their partner’s income and cover any debts.

Supplemental life insurance policies to consider if you need more coverage

Here are a few supplemental life insurance policies to consider:

1. Term life insurance

Term life insurance can cover the policyholder for a fixed period, such as 10 to 30 years, depending on your choice. If you choose a longer term length, your premiums may be higher. When your policy expires, you can  renew it if you have a renewal rider, or you will need to buy a new life insurance policy to continue coverage.

Term life insurance offers more affordable premiums for the coverage provided. According to Forbes, a 20-year, $1 million policy for a healthy 30-year-old male costs $480 per year. That’s just $40 per month. As a result, this can be a good option if you’re looking to save money while getting a substantial amount of additional coverage.

2. Universal life insurance

Universal life insurance is a permanent policy, so it lasts for life. It also lets you increase your death benefit for higher premiums or reduce your premiums by lowering your death benefit. Universal life insurance also comes with a cash value growth component. Part of each premium goes into your cash value and grows on a tax-deferred basis.

Once you gain enough cash value, you can withdraw from or borrow against it at low rates and good terms. If you surrender your policy, you can receive the full cash value minus surrender charges as well. Finally, you can use your cash value to pay your premiums when there’s enough available. Your policy won’t lapse as long as you maintain enough cash value.

Universal life insurance might be a good option if you need lifelong coverage since many workplace policies are term life insurance, and you can’t take them with you if you switch jobs. A universal life policy may also be right for those with complex financial plans.

3. Final expense insurance

Final expense insurance is a small permanent life policy designed to cover final expenses, like funeral costs and medical care. The death benefit is smaller, but premiums are quite low. As a whole life policy, it also offers cash value that grows at a fixed rate.

Final expense insurance can be good if your loved ones will only need enough to cover these end-of-life costs. This type of policy can help them ease financial stress while they grieve.

The bottom line

In general, it’s recommended to get enough coverage to replace 10 years of your annual salary. However, many other factors can impact your overall needs. Regardless, there’s a good chance you’ll need more than your employer can provide. In that case, you have several supplemental life insurance options.

Term life insurance may be great if you need the most coverage on a budget, whereas universal life insurance can be a better choice if you need lifelong coverage and more savings-building options. Meanwhile, a final expense insurance policy could be a good option if your loved ones need enough to cover end-of-life costs. So, before you rely on just your group life insurance policy, make sure to calculate your life insurance needs and get a supplemental life insurance policy if you need more.

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