A viewer asked--I Have Life Insurance Through Work. Is That Enough? What are the Pros and Cons of Group Term Life? We answer!
Neither of us sell life insurance. We're fee-only financial planners who help make sure that clients don't have too much or too little life insurance.
John Scherer is our resident life insurance expert. He explains how much people need and common guidelines.
We talk about:
Who needs life insurance"?
Who might want life insurance, but don't need it?
How much life insurance should you get?
Is the amount that work provides adequate in your situation?
What are some of the cons of group term life insurance that you get through work?
When we work with older clients, when they're having grandchildren, often they're the ones that let their kids know how much life insurance they should have.
By the end of the video, you should feel confident about your life insurance choices and have a good idea what choices to make to protect you and your family.
Here's Bridget's firm website: https://www.sullivanmermel.com
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
Thanks for watching and please subscribe!
John: I've got life insurance through work. I don't need any more, do I? That's going to be our topic in today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. Before we go further, please subscribe. It helps our channel, and it helps us reach more people. So, John, you talk to people about life insurance all the time. And we're different because we're not selling life insurance. We're just looking at people's life insurance to try to help them analyze. What do you tell people about life insurance?
John: Yeah. Most people haven't had somebody take a look at their life insurance who’s not trying to sell them more insurance. And so, we simply say, “Hey, here're these insurance options.” And we talk in our office a lot about some ideas to take back to your agent and some ways to think about things. And one of the situations that we just presented, says, “I got coverage through work. I'm all taken care of, right?”
Well, let's take a look at what that means. And so, of course, we can't give individual advice here, but a good rule of thumb is to take your income (whatever you make before taxes; what's your salary?) and somewhere between eight and twelve times that is in the ballpark for what most people should have in their life insurance policy. And when you do the math on that, that can be a lot of money. And you think, “Well, wait a minute. I don't want to be worth more dead than I am alive.” In any case, that is a range that we talk about with folks.
Bridget: And the people who need it are people who have young kids.
John: Yeah, that's the big one. Definitely.
Bridget: Or if you have a dependent spouse—you're making more money than your spouse.
John: That's right.
Bridget: You want to help them through difficult times if you do pass away. So if I pass away, I want them to be able to pay off the house or just have a bunch of money. It doesn't necessarily solve every potential problem, but it would be very helpful.
John: We address this with all our clients—whether they're 30 or 75. And obviously for people in the 30 to 40 age demographic, it's more typical that we have a young family to protect. When we talk about it with our older clients, we say exactly what you said. When you get to a certain point in life, you probably don't need any more life insurance, but then when you're at that point oftentimes your kids are in a position where they might need life insurance and help in thinking through these things. I think it's just good information for everybody to know about.
Bridget: And I think a lot of parents that I talk to are trying to help their kids “adult.”
Bridget: That's what they call it these days—adulting. And geez, I need to adult myself. I'm not just putting it on the 25-year-olds, but I would say that a big blind spot that people have is understanding that their kids, that parents with young kids need life insurance, and they probably need more than just what's available at work.
John: And that's the other thing to circle back on. You can say, “Okay, we have this ten times our annual income idea, so what does that mean?” Circling back to thinking, “Hey, I have coverage through work.” And so, we look at—and I'm sure you do, too—the benefits. What do the benefits actually provide? One time, two times, five times your salary.
First, it’s probably not enough life insurance available through work. The other thing about life insurance through work is that the insurance company owns and controls that. They can decide to raise rates. They can decide to stop offering coverage. What if you take a different job and if your health has changed, you find out in your thirties or something that you've got some kind of crazy cancer or whatever.
And now you think, “Jeez, I'd like to take this other job, but I've got some sort of compromised health, and I might not be able to get life insurance.” What if this new startup company you want to work for doesn't offer life insurance, and you think, “Golly, I got this health issue that I want to have coverage on and maybe my life expectancy is compromised, but the insurance company controls everything.”
When you buy a policy directly through an agent or through a life insurance company, however, you control that. The company can't change those policies, almost across the board, unless you stop paying premiums. You've got that portability, too. If you think, “Listen, I can get coverage through work or I can get coverage on my own,” and they’re about the same price, having that control can be a really big deal. People don't often think about that when they’re just signing up for benefits at work.
Bridget: Yeah. John, you worked in the life insurance industry for a time before you were a financial planner, so you have a breadth of experience about it. Tell me stories about when you had a client with life insurance, not enough life insurance, too much life insurance, et cetera. What's your experience with that?
John: Yeah, it's interesting; we find a lot of people like that. Here's one of the examples that I give to people; we talk about it all the time. People say, “Geez, I need a million-dollar policy? I need that much insurance? I don't want to be worth more dead than I'm alive.” A million dollars is a lot of money if you win it in the lottery, but it's not a lot of money when you've got to raise two kids for the next 18 years as a single parent and your primary partner in life, your spouse, and the parent of your kids is gone. So part of it is that it's not just an economic decision.
Back in the 1980s, here up in Madison, Wisconsin, the head football coach had a heart attack and died. And I've been at seminars or workshops where his wife had spoken about their family had enough in life insurance and she could take care of the kids and those sorts of things. But with the emotional aspect of losing your spouse, do you want to continue to work? And oftentimes we'll have people in that situation.
We have a younger married couple as new clients, and wife's an attorney and makes most of the money in the family, while the husband works part time and takes care of the kids. Well, his income contribution to the family isn't great. You do the ten times his income calculation, and it's a pretty low number. But one of the things to consider is for her saying, “Listen, if he gets in a car wreck and is gone tomorrow, am I going to continue to work the same schedule? Am I going to continue to do those things?”
If you have a stay-at-home parent in this example, one of the reasons is so that somebody takes the kids to their soccer practice and piano lessons and that somebody is around oftentimes. If your spouse isn't there, are you going to want to be working your 40, 50, 60-hour work weeks, those sorts of things? So maybe some of that protection is for the working spouse. It’s kind of counter intuitive, but the real-life part of it carries a lot of weight. It's not just like some other things; here is our math equation.
If you think about your spouse not coming home one day and what that means and how that might affect you, having enough coverage is really important. We always tell people to err on the high side. You don't want to pay too much and have all kinds of crazy insurance, but you sure don't want to have that kind of horrible surprise and then be forced to continue to do things, like work, that you really don't want to do.
Bridget: Absolutely. And I think you bring up a good point, too. And I just want to state it explicitly. Even if somebody's not the primary earner, it makes sense to have insurance on them anyway, because if they're gone, you’re going to have to pay to replace that somehow. Either you quit your job or work less and do those household activities or you hire somebody else to do them.
And like you said, you're not going to be in an emotional state better than before, or for most people, at least, death of a spouse does not increase their emotional capacity and ability to deal with things. It's not like, “Okay now I'm going to get into action.” No, you need time to grieve and deal with everything; there's a lot coming at you at that point.
John: That's right. You just brought up a great point. I'll have people that will say, “Well, even without a stay-at-home spouse, we could hire a nanny and that's a relatively low cost in the grand scheme of things. I'm making several hundred thousand dollars a year, so I can pay somebody $2,000 a month to come in and do this.”
This sort of thought process may be true but is that really what you want? Do you want somebody else doing those things for you? And maybe the answer is, “Yeah, that's just fine.” But on that other side, that personal and emotional side of things, it might not be fine. I appreciate your comment from earlier, “You don't get more emotional bandwidth after losing a spouse.” When you think about that you go, “Oh yeah, right. It's not a math equation.”
One other thing that we'll have people bring up is: “Through benefits at work I get this accidental death and dismemberment policy, AD&D. This insurance adds whole bunch of coverage. Why do I need to get other individual type coverage?” And so, my response to that is, listen, if you're in a car wreck and you die and your family needs this money to live on, how is it any different than if you find out you got some kind of crazy cancer or you have a heart attack?
If you need to protect your family, the cost for those accidental policies is tiny. And there's a reason for that; the payouts don't often happen. So just get enough coverage as a base, not these specialty type coverages, which sound appealing, but when the rubber meets the road, it's a matter of getting your own coverage that you can control.
One other quick story on that, Bridget. We had a client who had coverage and a small family. He found out that he had cancer. Fortunately, everything worked out really well for him, but it was at a time when he was looking at making a change and starting a business. If something happened, he needed to have coverage. And if he didn't have individual coverage outside of employment benefits, there is no way he could’ve gotten insurance after getting cancer—somebody who was a relatively young person couldn't get coverage.
So if he hadn't purchased insurance when he was an employee and done it on his own, life insurance would have been a big stumbling block in making a move to running a business. And so, when you think about those things, though it doesn't often come up, for a relatively low cost, it is very important to be able to protect against those types of things.
Bridget: It seems like that's a good place to wrap it up. I'm Bridget Sullivan Mermel, and I have a fee-only financial planning practice in Chicago, Illinois. And I'm with John Scherer, who's got a fee-only financial planning practice in Middleton, Wisconsin. And we're both proud members of ACP, the Alliance of Comprehensive Planners.
John: That's right. And if you like the things we talk about on the show and would like to find an advisor who thinks like us, visit acplaners.org to find an adviser in your area. And don't forget to hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.