How Life Insurance Works and Your Employer’s Policy Is Not Enough

Note – The following post about how life insurance works is sponsored by USAA. All opinions are my own.

My wife and I have life insurance through our employers. But, here’s a secret Americans don’t talk about much – Our life insurance from our jobs isn’t always enough. In fact, most of the time it’s not enough coverage to protect our families should the unthinkable happen (the death of an income earner in the family).

I’m in the US Army. I have Servicemembers Group Life Insurance (SGLI) to the turn of $400,000 in coverage. While SGLI’s $400k is a very generous term life insurance policy and it has very low premiums, it’s still not enough insurance coverage. I have four additional people at home who are counting on my income.

So, $400k isn’t going to ask my family long. In fact, most financial experts recommend that you use ten times your annual income as the rule of thumb for life insurance coverage. $400,000 doesn’t even give the family of a brand new Second Lieutenant ten years of income. You need more.

Most Employers Provide Only 2 Years of Coverage

The same is true for the civilian sector. And, in many cases, it’s even worse. A common misconception about life insurance is that the amount of coverage your job provides is sufficient for meeting your family’s needs.

The average American public company typically provides two years worth of salary as a life insurance payout. Two years worth of salary isn’t enough for a surviving spouse to live on if they relied on your income as part of the family’s budget. In reality, companies rarely provide their employees with enough life insurance to completely cover all of their family’s expenses. You may need more life insurance than you receive through your employer.

So, do you need more life insurance? What kind of life insurance will fit the bill?

41% of Americans Have NO Life Insurance

According to recent surveys, over 41% of Americans do not even carry life insurance. Many people mistakenly believe they don’t need life insurance unless they have young children.

There are many instances where your family may need additional financial protection through life insurance. Maybe you have a lot of debt that you need to cover with additional life insurance. Perhaps you need more coverage than your work provides to help pay for college tuition. Or, your elderly parents or in-laws need care. These are just a few examples of why you may need more life insurance. But, every situation is different.

Understandably, life insurance is a difficult subject to think about and discuss with your loved ones. No one wants to think about what would happen if they were to die prematurely. But, it’s important to have these discussions with your spouse, partner, children, and other potential beneficiaries so you can determine how much coverage you actually need.

So, do you know how life insurance work? Do you know if your life insurance through work is enough? The answers might surprise you.

Here are a few more things you need to know about life insurance to understand why you may need more coverage than what your employer provides.

How Life Insurance Works

There are several different types of life insurance. You may find that different people need different types of life insurance policies based on their situation in life as a family and their goals for the coverage.

Types of Life Insurance

In regards to the different life insurance policies available, there are three main types to choose from: whole, universal, and term life insurance. Here’s a brief overview of each type.

Whole Life

Whole life insurance comes with fixed premiums. So, you pay the same price each month over the course of the coverage – and as long as you remain current on your payments, the insurance covers you for the rest of your life. Whole life insurance is expensive and not recommended for most people. Most people will do better financially with term life insurance policies.

Universal Life Insurance

Universal life insurance is another form of permanent life insurance that gives you access to flexible premiums (which typically go up the older you get) and flexible death benefits. Similar to whole life insurance, universal policies may accumulate cash value over time, which you may be able to borrow from while you’re still alive.

Like whole life insurance, universal life insurance policies are expensive and not recommended for most people. Most people will do better financially with term life insurance policies. Financial experts, like Dave Ramsey, recommend buying term life insurance policies and saving or investing the differences you save in premiums between whole/universal life and term. The savings alone can quickly add up to thousands of dollars.

Term Life Insurance

Term life insurance lasts for a specific number of years (typically 10, 15, 20, 25 or 30 years), and then expires without a payout to beneficiaries if you are still alive by the end of the policy. And, the premium never goes up during the term you choose. Term life insurance is the most affordable life insurance option because there is no payout unless you die within the policy’s specified timeframe, and it does not accumulate cash value over time.

For most people, term life insurance is the best option. Very few consumers need permanent life insurance.

It’s important to remember the reason behind purchasing life insurance. Life insurance is not an investment. It’s a plan to protect your family and loved ones who depend on your income. In the event of your unexpected death, you need life insurance to ensure that your family’s needs are taken care of since they won’t have your income to depend on anymore.

Do I Actually Need Life Insurance? 

According to recent surveys, only 71% of the husbands in America own life insurance. And, only 64% of wives have life insurance coverage. The lack of life insurance coverage is especially troubling if you have children at home.

Do you have enough coverage to help you raise your children should you die early? What about the cleaning? Transportation? Education costs? There are a lot of things to factor in when you think about when looking to replace lost income with insurance.

Life insurance isn’t just for working parents with small children at home. It can be useful for anyone who has someone dependent on them for financial support or care. Even stay at home spouses need life insurance. You should also consider children living with you or depending on you for financial support while in college or elderly parents if they still depend on your income. These are the people life insurance protects.

In addition to helping your family stay afloat financially after your premature death, life insurance can help cover other expenses, such as your funeral. After all, the average cost of a funeral in the U.S. is currently about $6,200 to $7,300 (depending on whether you choose cremation or burial), which can take a severe toll on your family’s finances if they’re not prepared to shell out thousands of dollars for an unexpected expense.

You don’t need separate life insurance policies for funeral costs and other things like that. You just need the life insurance that’s provided by your employer and an additional term life insurance policy if your policy from work doesn’t cover all your needs.

When Should You Get Life Insurance?

It’s almost always better to get life insurance while you’re young because you can lock into low, fixed-rate monthly premiums. The problem with life insurance is that many young people in their 20s and 30s assume they don’t need life insurance. Or, they assume what minimal coverage their job provides as an employee benefit is sufficient. So, they don’t think about what they’re needs will be in the future (10 or 15 years away) and take advantage of low rates while they still can.

But, people who are in their 50s and 60s  or have pre-existing conditions may not want to get life insurance, of course. A life insurance policy in these situations will likely cost you significantly more than a younger, healthier individual simply because that’s how insurance companies determine rates. However, you could jeopardize your dependents’ if you die prematurely without any (or too little) coverage. So, an expensive life insurance policy may be preferable to no life insurance at all.

How Much Does Life Insurance Cost?

Life insurance rates are predicated on a variety of factors such as:

• Age
• Gender
• Health condition
• Occupation (riskier jobs get higher insurance rates)
• Dangerous hobbies like skydiving
• Length of coverage term
• Amount of coverage you want

When it comes to your health, some life insurance companies may ask for a detailed medical background, which could include personal information such as your weight, cholesterol levels, blood pressure, whether or not you smoke or drink alcohol (and how much), family medical history, and so on.

Fortunately, some life insurance companies may offer a reduced rate to customers who quit smoking since taking out a life insurance policy or have lost weight by working out. So, be sure to contact your provider if/when you make these life changes to see if you qualify for lower premiums.

Is My Life Insurance Through Work Enough?

You may think you have enough coverage through your employer if they offer life insurance through work as a benefit to employees. However, that coverage is typically only $25,000 to $75,000. Or, it might provide you with a multiple of your annual salary. Most employers offer around two years of your salary in life insurance benefits.

But, two years worth of your annual income is typically not be enough coverage for your family if you happen to pass away unexpectedly. Most financial experts recommend ten times your annual salary as a rule of thumb. You may be able to get away with less, but you also need to add enough coverage to pay off any debts you have, education costs for your children, and funeral expenses.

These costs can really add up. But, typically ten times your annual income will usually cover it. But, you should run the numbers and talk to your insurance company or a financial planner to help you run the numbers.

Another issue with employer-provided life insurance is that the coverage typically expires if/when you stop working for the company. You could work for the same company for several years and lose all life insurance coverage if you quit or get laid off and don’t have any additional term life insurance policies in place. Since insurance premiums are more expensive the older you get, having to take out a new life insurance policy in your 40s, 50s or 60s could leave you vulnerable to high monthly premiums.

How Much Life Insurance Coverage Do You Need?

A good rule of thumb for calculating how much life insurance you need is multiplying your annual income by 10. So, for example, if you make $50,000 per year, then $500,000 in life insurance coverage should be your goal (or $1,000,000 for an annual income of $100,000).

Since your employer likely doesn’t offer this much life insurance coverage, you’ll need to take out supplementary life insurance to ensure you protect your family, no matter what happens.

Why I Choose Additional Life Insurance from USAA

My wife and I have additional term life insurance policies from USAA. We’ve been members for over 20 years now.

I don’t talk much about it here on Money Q&A, but I’m an active duty officer in the Army. The United States government provides low-cost group life insurance for the military called Servicemembers Group Life Insurance (SGLI for short. You know that we like our acronyms in the military! And, SGLI is good for the length of time (the term) that you serve in the military.

SGLI provides coverage up to $400,000. While $400,000 is a lot of money for most families in America, that amount still doesn’t give me ten times my annual income. And, it doesn’t cover the college education costs and liabilities my family has.

That coverage barely provided me ten times my income as a new Second Lieutenant in the Army at age 22, and now my wife and I have three kids and a lot more income. We knew from the beginning that we needed more coverage than what we would get solely from SGI. And, I never thought in the beginning that I’d make a career out of the military.

So, I’m thankful that I bought term life insurance at age 22 when I started working right after college. USAA also has term life policies designed specifically for service members with things like not having a war clause and an insurance rider that guarantees replacement of SGLI when you separate or retire.

USAA Term Life Insurance

Owning a USAA term life insurance policy guarantees you the option to replace some or all of the SGLI lost as a result of military separation or retirement, even if you are disabled. And, if you’re between 18 and 35, you can get another $100,000 of term life insurance when you marry, buy a house, or have a baby. With a USAA term life insurance policy, servicemembers are also covered for $25,000 if you suffer certain severe injuries in the line of duty.

I love USAA. They’ve always been a great bank, investment brokerage, and insurance company for my family. I think when you add up all the products and services that my family uses through USAA we have over 20 different ones we use. 

We have savings accounts, brokerage accounts, homeowners and auto insurance, and even umbrella insurance through USAA. I’m a huge fan and would highly recommend you check them out. You should at least get a quote for insurance coverage from them.

You don’t have to be a member of USAA to purchase life insurance through USAA.

Be sure to visit USAA to learn about the different types of life insurance, use an interactive tool to see how much life insurance you and your family need and more.

Life insurance isn’t a fun subject for anyone to think about. But, it could make a huge difference when it comes to how your family financially copes with your unexpected death.

Whether you’re in your 20s or currently retired, you should consider having a term life insurance policy to protect your loved ones. It can protect you from an unanticipated funeral, legal, education, liabilities, and other expenses as well as provide income replacement.

Many people are surprised by how life insurance works. And, they don’t realize that they may not have enough life insurance through work. That’s why you have to consider purchasing an additional life insurance policy.

What about you? How much life insurance coverage does your job provide you? Have you thought about buying additional term life insurance?