In May, I wrote an article (Plug Your Expense Leaks) about expenses that can hide in plain sight. My example was pointing to group life insurance I get from work. It’s my belief that many people are better off buying an outside policy versus their group life insurance at work.
As a 20+ year employee with a non-working wife and two kids, life insurance was important to their future. So like most young people, I bought the group life policy at work. I was 35-years old, making $51,000 with two young kids (4 & 1) and a non-working wife.
But as a I got older (and wiser) and started making more money, it became apparent that I needed more life insurance. I had maxed out my group life insurance at work so I contacted my insurance agent to discuss options.
So at 47-years old, I obtained a $1,000,000 twenty-year term-life policy outside of work. That policy cost $1,992 per year compared to the $927 for $460,000 of coverage at work. On the surface, it seemed like a good decision and my family had nearly $1.5M in life insurance coverage. What I didn’t see coming (and my agent didn’t warn me) was the cost increase coming my way.
Turning 50 Changed The Equation
As mentioned in my May article, many expense leaks occur because we automatically renew services without knowing the cost. That’s what I did 6-years ago when I was turning 50. When open enrollment at work occurred, I didn’t realize my group life policy was increasing 83% (see chart below). That was a 6-year leak.
NOTE: I could have bought more life insurance coverage if I had shopped around more or went with some of the online quotes. It would have made this comparison even more advantageous to the term life policy outside of work.
And then I turned 56 this year and my work group life policy increased another 85%. Sadly, I didn’t realize this until after open enrollment. So I’m paying $1,936 more out of my pocket in 2019 – talk about a leak!. I consider this inexcusable on my part … I should have seen this sooner. That’s why I’m writing this article — hoping others can learn from my mistake and eliminate leakage in expenses.
So for the last 7-years (age 50-56), I’m paying much more for life insurance – that is bad enough. The ridiculous part is I’m paying more for significantly less coverage compared to my term life policy.
The chart below shows I’m currently receiving only $155 of group life insurance coverage for every $1 spent. The $155 is way low in comparison to the $502 of term life insurance coverage I’m receiving for each $1 spent. This is a big deal, folks. This is the leak – paying more and receiving less.
Should You Buy Group Life Insurance?
I’m guessing I bought my first group life policy through work in 1993 – the year I got married. It was easy to purchase and it came directly out of my paycheck. But should I have bought it or should I have purchased a term life policy from the beginning? I suppose that is the question we need to answer.
First, let’s look at why buying group life might be a good option. The big reason to buy group life through work is if you have a serious or preexisting health condition. These conditions might keep you from buying life insurance outside of work. Additionally, it’s possible you could buy for the short-term. This means you may see a short-term price advantage or convenience may be a reason to buy.
Here’s the bottom line. You may have a short-term reason to buy a group life policy through work but long-term you’ll want to buy a policy (or two) outside of work. As you age and as your income increases, the price of the group life policy loses any short-term advantage it may have. Just look at my charts above for proof that I should have bought a $1.5-$2M term life insurance policy and cancelled my work group life policy.
Conclusion
Like I state in the last paragraph, it’s my experience that buying a term life policy outside of work is your best bet in the long-term. There is no denying I’ve spent more money for much less coverage. Do the numbers lie? I don’t think so and that’s the counsel I’ll give my daughters when they need life insurance later in life. Of course, it’s worth checking out all the options before making this decision and let the numbers show you the way.
During open enrollment this November, I’ll be cancelling my group life policy and putting the extra $4,222 toward my mortgage balance. If I were to die on January 1, 2020 after I cancel the group life policy, Mrs. TLR will still have access to:
- $1,000,000 term life payout
- Over $500,000 in investable portfolio assets
- She’ll receive 50% of my pension, which should pay her about $35,000 annually
- She’ll have access to my social security benefit
The $650,000 group life policy is just too expensive and I think Mrs. TLR will be fine without it. Our focus is to pay off the mortgage in the next 2-3 years and this extra $4,222 annually will help.
I hope this was helpful and you learned that leaks in expenses can be very costly.
Thanks for reading!
Mr. TLR