One of the more common questions I address from younger clients when they first come into my office is where to buy life insurance. Most W-2 employees have a base amount of life insurance provided by their employer. This is a benefit provided to all employees free of charge. However, for many clients, especially those with children, this amount of life insurance isn't enough. For those individuals, employers also offer the chance to buy additional or "supplemental" life insurance. And for younger clients, this seems like a great deal as the price is typically extremely low and they don't have to do anything to purchase it, other than sign up and agree to have a few extra dollars/month deducted from their paycheck. So, is the solution as easy as that? Probably not. While there are numerous reasons not to purchase a supplemental life insurance policy from your employer (portability, conversion options, rider benefits, etc.) I'm going to focus on just one right now, since this seems to be the one my clients care about most - price. On its face, buying supplemental life insurance from your employer when you're young looks like a great deal. Because it is. But there's a catch, what is a great deal today is, with each passing day, becoming a less good deal. Until it becomes a terrible deal. Unfortunately, by that point, it's often too late to correct the mistake, at least not without some significant financial pain.
The above table is an example of supplemental life insurance costs through an employer. Things look pretty good when you're young (under age 35), as you can pay just $258/yr for $500,000 of life insurance. This is a much better price than your annoying brother-in-law, let's call him "Joel," offered when he tried to sell you some last year, or even when you hopped online to your favorite life insurance quote engine (I know you have one)! But look what happens as the years go by. You'll see the price starts to increase as you get older and your "age band" rises. Age 35-39, still not bad, $390/yr. Then around age 40, things start to change - the cost curve starts to go exponential. And by age 50 you're paying ~6.5 times what you were paying at age 34. Unfortunately, at this point, you've got two kids in high school, one in college, and a spouse who decided they needed to go back to school for a 2nd degree. You really need that life insurance. So you go back to "Joel" hat-in-hand only to find his price has changed too! Fifteen years ago he offered $543/yr for 30 years for $500,000 of life insurance. Now he offers you $1450/yr for a 15yr $500,000 policy! But what if you had done things differently? What if you had taken "Joel" up on that offer 15 years ago? Take a look at the illustration below which compares buying a $500,000 30yr level term life insurance policy with buying the same $500,000 of life insurance over the years through your employer as a supplemental life policy:
What we see is that by electing to pay a bit more in the early years (That $38.41/month price is for a "Super Preferred Non-Smoker", with the other prices to the right of it for a "Preferred Non-Smoker," a "Non-Smoker Plus," and a "Non-Smoker") you stand to save tens of thousands of dollars over the life of the policy. Indeed, while the total cost for the Supplemental Life insurance is a whopping $67,650 over 30 years, the cost for a 30yr level term life insurance policy ranged from $13,827 for a super healthy person to $27,529 for a not terribly healthy individual who doesn't smoke. This means the savings could be almost $54,000!!! The moral of the story? In almost all instances, buying a private market, level term life insurance policy is a better deal, in the end, compared to buying that "cheap" supplemental life insurance policy through work.
