The other day, Mrs. Frugal got something in the mail from that provided us with the ability to buy life insurance through a plan affiliated with her employer. It seems as though life insurance is something many of us are thinking about right now with the sudden deaths of Michael Jackson and Billy Mays, so I wanted to put some comments up about life insurance.
I talked with another financial planner (Justin Krane at Krane Financial Solutions) about things to think about when it comes to buying life insurance through an employer and he had the following points:
- If I leave my employer, could I take the life insurance policy with me? Is it portable?
- If I do take my insurance with me when I leave, what kind of policy would I have?
- If it’s term insurance, how many years will I be covered for before it expires?
- Is the policy convertible? Can I change it to whole life or universal life insurance if I wanted to while I am still employed, or when I leave?
- While I am still employed, will my life insurance premiums stay constant, or can the rates increase? If so, how often will they increase? (it’s usually every 5 years or so)
- What is the maximum coverage I can buy at my employer? Is it enough coverage?
Item #6 could be a whole conversation. A good rule of thumb is that if you pass away you should have at between 20 and 30 times the annual income you want to replace.
When it comes to replacing “income” of a stay-at-home parent who takes care of the children, some families opt to replace the working spouse’s income with the idea that the surviving spouse will stop working in order to take care of the children.
Another point of caution is to not buy too much insurance. I know it sounds funny, but you don’t want to pay for more than you need. It’s the frugal thing to do.