Don't Follow the Group

I have group life insurance at work. Do I need to buy additional coverage?

With all of your responsibilities, it's a smart move to re-evaluate your life insurance needs. Experts say it's something everyone should do from time to time.

We'll warn you up front: We have some pretty strong views when it comes to life insurance. We like to see people buy an adequate amount of coverage to protect their loved ones for the lowest price. Unfortunately, most of us can't meet these criteria with a group plan. Here's why.

First, most employers provide their employees with a minimal amount of term life insurance — say, $25,000 or $50,000. If you need more coverage — and who doesn't? — you would need to purchase it through the insurer and have the premium taken out of your paycheck. But since these companies don't require a physical exam, they usually limit the amount of additional coverage to two or three times a person's salary, says Byron Udell, chief executive of AccuQuote, an online insurance broker. Most experts agree that for people with two kids to support, seven to 10 times is more appropriate.

More important, as soon as you leave your employer — regardless of whether you quit, are laid off or are fired — you lose your coverage. Don't expect life insurance to be part of a severance package. "There is no COBRA for life insurance," says Bryan Place, principal owner of TermAssistant.com, an Internet-based insurance broker.

Now, there are some plans that you can purchase through your employer that you can take with you. These aren't term policies, but rather whole life or universal life — which include both an insurance and savings component — and we wouldn't recommend those, either. They often sound like a good deal, and some companies even subsidize them. But don't let the cute little Aflac duck seduce you.

Experts say these plans don't look nearly as attractive when you read the fine print. While they appear to cost the same amount as a plan you would buy on your own, they accumulate far less cash during the lifetime of the policy, making them a bad investment, warns AccuQuote's Udell. The only scenario in which these could make sense is if someone were in poor health and thus unable to buy a reasonably priced plan on his or her own.

A better alternative for most people: Buy a term life insurance policy on the individual market. With term life, you can provide your family members with the financial security they need for the next, say, 20 years, until you're ready to retire and the children are out of the house. How much do you need? Our calculator can help you figure this out. It takes into account your surviving spouse's living expenses and expected college tuition bills for your kids.

The good news is that term life insurance has never been cheaper. Indeed, it's 60% less expensive than it was just 10 years ago. In today's market, an insurer would charge a 45-year-old healthy male $1.40 per $1,000 of coverage. As the face value goes up, the price decreases slightly. That same 45 year old male, for example, can buy a $1 million policy for $1,255 a year or just $105 a month, says Udell.

Why not whole life? We think it's best to keep your insurance needs and your savings separate. Consider this: A 45-year-old healthy male will pay roughly 10 times more for a whole life policy in exchange for the investment component of the product. Since premiums run pretty high, many experts reserve whole life for wealthy people who are concerned about estate taxes.