Skip This Workplace Benefit

As you review your workplace benefits during open enrollment (and you are reviewing, right?), I want you to ignore the life insurance benefit.

The honest truth is that life insurance offered as a free employee benefit can leave your family in a huge financial hole.

The problem is that most employers typically offer a life insurance benefit that will pay one or maybe two years of your salary to your beneficiary if you die while employed.

I am not saying that’s a lousy benefit—but it is a dangerously insufficient benefit.

My advice is that, at a minimum, if there is anyone (or multiple members of your family) dependent on your income, you should have a life insurance policy that will pay out at least 20x their annual living expenses. (A death benefit that is 25x annual living expenses is even better.)

So now you understand my problem with workplace life insurance. A death benefit equal to a year or two of salary is not going to come close to my 20x-25x rule. If there are people in your life who are dependent on your income, you need to purchase additional coverage to meet the target.

A higher life insurance benefit is how you literally buy your family financial peace of mind, if you were to die without other assets they could rely on. A large death benefit equal to at least 20x annual living expenses can be invested cautiously (such as in tax-free municipal bonds) to allow your loved ones to live off the interest.  This is especially important for younger families. It can give a surviving partner the flexibility to scale back, or stop working, or continue being a stay-at-home parent, without worrying about paying bills.

And the good news is that if you are in generally good health, the type of insurance you need, called term life insurance, is not going to be a budget buster.

As its name suggests, term life insurance lasts for a set period (term) of time. A 20-year policy will charge an annual premium for 20 years, and if you die during that 20-year term,  it will pay out the death benefit to your designated beneficiary(ies). You get to choose the term. It can be 5, 10, 25 years — or even longer.

For a 35-year-old male in average health (non-smoker), the average annual premium for a 20-year term life insurance with a $500,000 death benefit is likely around $350. For a 45-year-old, the annual premium would be around double that. Annual premiums for women at similar ages are typically lower.

To be clear: when you buy a “level term” policy, the premium you pay in the first year will be the same premium you pay every year. Given the annual premium for a policy bought at age 45 is still less than the average monthly payment on a car loan these days, you can’t tell me you can’t afford to buy term insurance.

You may be able to buy additional coverage through your employer’s insurance. The younger and healthier you are, the more I insist you do your own online shopping (just search for term life insurance to get started). There’s a good chance the premium will be lower in the “open” marketplace.