If you think buying life insurance at work is saving you money, then you may be surprised to learn that many employees are saving thousands of dollars by buying life insurance directly from an agent.
Recently we had the opportunity to help a friend who purchased life insurance at work. He told us he had a $500,000 life insurance policy and wanted to know if it was a good deal. After we had reviewed his Federal Plan, we discovered that his rate would increase four times over the next 20 years and that He could save $19,564 over the same time period by switching to a personal plan. He was shocked and happy to make the switch.
The irony is that the same company that offered him a policy at work, offered him a personal plan that cost $19,564 less. Savings like this are common, and many employees don’t even realize they could be saving a lot of money by switching to a personal plan.
Why does life insurance at work cost more?
You may be curious why life insurance at work may cost so much more. That is a great question.
When you purchase life insurance at work, the insurance company offers one rate to all employees that are the same age. That means that whether you are in excellent health or have several health problems, you will pay the same price. That is good news for those who are not in good health, but if you have no medical problems you are likely paying more than you should be. Most group plans also offer the same price to smokers and non-smokers, and that increases the cost significantly for anyone that does not smoke cigarettes
There are three big reasons why you should avoid life insurance at work and buy a personal plan.
1. The Price Goes Up Every 5 Years at Work
If you started your life insurance at work in your 20’s or early 30’s you probably didn’t expect to pay hundreds of dollars a month for life insurance. That is because life insurance at work starts out affordable when you are young and becomes very expensive as you get older.
With most work plans the price increases every five years when you turn age 30, 35, 40, 45, 50, 55, 60, and 65.
For example, a 40-year-old purchasing a $500,000 plan with Pima County will pay $53 a month, then the price increase to $79 at age 45; at age 50 they will be paying $123 a month, and by the time they are 65, the cost will be $663 a month.
A smarter financial move would be to purchase a life insurance plan that is guaranteed not to increase. You can buy a term life insurance plan with a price that is guaranteed for 10 years, 15 years, 20 years, 25 years, 30 years, or even to the age of 65 based on your needs.
For example, a 40-year-old female in good health that qualifies for a preferred rate would only pay $47 a month to the age of 65 if she purchased a 25-year term plan. A 40-year-old man that is eligible for a preferred rate would pay just $55 a month to the age of 65. If we compared these prices to the Pima County rates shown above the savings would be significant. Over the next 25 years, the women above would save over $35,000 and the man would save over $33,000.
2. What happens when you switch jobs?
Another problem with buying life insurance at work is that you may lose coverage when you change jobs, or your rate may increase.
Every plan is different, and you will need to check with your life insurance company for the details of your plan. For example, under the UPS life insurance policy offered by Prudential, if you switch jobs or retire you can continue your coverage but will need to pay 20% more.
If you are not able to keep your life insurance policy once your employment has ended it can be a major problem. If you are diagnosed with cancer, heart disease, or another serious illness you may not qualify for life insurance which means your loved ones will be unprotected. When you buy life insurance directly from an agent, your policy cannot be canceled if you develop a medical condition once your policy is active.
3. You can’t buy enough at work
Another disadvantage of having life insurance at work is that you may not be able to buy enough life insurance to protect your loved ones adequately. Most group plans allow you to purchase a maximum of 3-7 times your annual income. That may sound like a lot of money, but that money will disappear quickly and without your monthly income it can run out in just a few years.
If you have a young family or want to provide an income to your significant others for many years to come you likely won’t be able to buy enough. A common recommendation financial advisors tell clients is 10-12 times your annual income. For a more accurate number, you can use a life insurance calculator to determine your needs here.
What are you going to do about it?
When you can show a life insurance company you are healthy and have no serious medical problems they are going to reward you with a better rate and that can save you a lot of money.
There is no better time to buy life insurance than today. You never know what your health is going to be like in the future. Don’t wait till you develop a medical condition to get a better life insurance plan. You can cancel your work life insurance plan once you have a new plan in place.
To find out if you are overpaying for life insurance at work you can compare quotes from over 30 companies here. You can also call Brown Insurance with any life insurance questions you may have or to request a free quote at 520-888-6900.