Ryan Brady
Appearances
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Life insurance is basically a safety net for anyone who depends on you financially. So if you die unexpectedly, life insurance provides money that could replace your income, pay off a mortgage, pay for your kid's college tuition, or really any other expense you want to cover.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
It can also give your loved ones the funds to cover your own funeral and burial costs without them having to dip into their own savings. And that can be a chunk of change, right? Yeah, it could be a lot. I believe the current estimate for funeral and burial costs is close to $8,000. Wow. Wow. So you typically you don't buy life insurance for your own benefit. You buy it for the benefit of others.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
So if you think about it, you know, our ability to earn income is really our greatest asset, at least for most of us. So we insure that asset through life insurance. That way, our loved ones can maintain their standard of living with hopefully minimal disruption. Of course, there are other reasons why some people buy life insurance, like for investing or estate planning purposes.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
But generally, it's best to think of life insurance as a way to replace your income if you pass away. Now, when it comes to your job, most employers in the U.S. offer a limited amount of life insurance for employees as part of workplace benefits. This coverage is usually what's known as basic group life insurance, and it's actually pretty easy to get.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
To opt in, all you typically have to do is fill out a form and maybe meet any eligibility requirements that your company has, such as working a minimum amount of hours per week. You also need to name a beneficiary, and that's going to be the person or it can be an entity like a charity to whom you want the payout from your life insurance to go when you die.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
And you can actually name multiple beneficiaries and update beneficiaries as your life circumstances change. So there's a lot of flexibility there.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
So ideally, you should really be thinking about getting life insurance when anyone depends on you financially. For some people, that could be kind of more in the beginning of their career. For others, it may be more in the middle. But really, everyone's situation is going to be different. So it really just depends.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
I'll say that for a lot of people, the need for life insurance comes up when they get married or when they start a family. And Liz, this conversation is pretty well timed because personally speaking, I just bought life insurance myself about a month ago.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Yep, yep. We have a baby on the way. Yay! Yeah, yeah. So in about four weeks, baby Colin's going to be here. So I thought, what better time than to get life insurance? Kind of got me thinking about it. If I get flattened by a bus tomorrow, let's say, would my wife be able to pay the mortgage, pay for the groceries, pay for college expenses or something down the road, all on one income? Right.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
And so the answer to that's probably not very easily. So I bit the bullet. You know, I wish I would have done it a little bit sooner, but I'm glad to have gotten life insurance.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Exactly. That's a great point. And also the need for life insurance becomes greater as you take on more debt and other responsibilities, like you mentioned, Liz, especially if you share those responsibilities with somebody else. But even if you don't have any big shared responsibilities today, you may still need to think about getting life insurance if you're planning to in the future.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Let's say if you want to buy a house or start a family down the road. And that's because life insurance is generally cheaper the younger and healthier you are. So it may be wise to lock in a policy now while you still qualify for those lower rates. And of course, you could always buy more life insurance later if you end up needing it. It just might be a little bit more pricey.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
One last thing I'll say here is that a lot of people think life insurance is expensive, and sometimes it is. But if you're relatively young and healthy, life insurance can be surprisingly affordable. According to Neuwald's analysis of life insurance rates, the average cost of a 20-year term insurance policy with a $500,000 payout is less than $20 a month for a healthy 30-year-old.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Yeah, you're right. When it comes to basic group life insurance, most employers do offer it as a job perk, and it's usually free. So there's a good chance you already have some life insurance coverage through work if you've opted in. And unlike many individual policies, you generally don't have to take a medical exam or fill out a questionnaire.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
The amount of coverage, though, is usually pretty low. Basic group life insurance is often capped at about one to two times your annual salary. So if you're making $50,000, you might have $50,000 or $100,000 of coverage.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
That's a good question. I'd say for some people, it may be enough, especially if you're single, you don't have any dependents or any big shared debt obligations like a mortgage. You know, maybe group life insurance is all you need for now. But I'd say for a lot of people, it probably won't cut it. That's why a lot of employers allow you to pay for more coverage through the group plan.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
They call this supplemental or voluntary group life insurance, and it's used to supplement or add to your basic group coverage amount. You can typically opt in for this extra coverage when you start a new job or during open enrollment.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
And because supplemental coverage is based on group rates, it can be less expensive than getting your own policy, especially if you're older or less healthy than most of your coworkers. As far as how much of it you can buy, I'd say the amount of supplemental life insurance you can get varies by company, but it generally maxes out at about $500,000.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
And when you tally up all the life insurance you have between your basic and supplemental group policies, that might be enough for a lot of people. If you're not sure how much life insurance you need, a general rule of thumb you'll hear is to buy coverage equal to 10 times your annual income. But I'd say that's a pretty crude estimate.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
And there's actually a lot that goes into figuring out your life insurance needs. So I'll just give a quick plug that Neuroball actually has a really great calculator that helps people figure out how much life insurance they need. So I encourage listeners to try that out if they're curious.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Yeah, sometimes you do. If you just purchase a small amount of additional coverage, you likely won't have to do any sort of medical screening. But if you want to get a lot of supplemental coverage, you may be asked to do a medical exam or at the very least fill out a simple health questionnaire. And depending on how that goes, there's a chance you actually might be denied coverage.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Yeah, so that's really the big downside to all this life insurance coverage you get through work is that when you part ways with your employer, you typically part ways with your group insurance coverage too. However, some policies may allow you to convert a group life insurance policy into an individual policy when you leave your job, but the price could go up quite a lot from there.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
So I wouldn't count on that as an option. And then you have to think about, you know, what if your next employer doesn't offer group life insurance? You may end up needing to buy your own policy anyways. So if you think you need life insurance, it may be better just to buy your own policy now is what I would say.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Yeah, that's absolutely right, Liz.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Yeah, there's a few things that could happen. With most life insurance policies, including supplemental group life insurance, companies can actually deny a claim if you take your own life. So this suicide clause typically will last two years after getting the policy.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
And then your claim may also be denied if your insurance company finds that you gave false information on your application or health questionnaire as well. So, for example, if you said you don't smoke, but your insurance company later discovers you died from a smoking related illness, it can actually deny or delay the payout to your beneficiaries.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Again, there's generally a two year window after getting your policy where they can do that. And insurance companies do this to reduce the risk of fraud. But the good thing is with basic group life insurance, they typically don't have those provisions. So your survivor should get a payout regardless of how or when you die.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
So you could probably guess what I'm going to recommend at this point, but I'd say it's generally better to get your own individual life insurance policy if you think you need more than what your company's free basic group coverage offers today. And that's because of all the reasons I kind of mentioned already. An individual policy is yours, right?
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
So it lets you maintain coverage even if you change jobs. And as we mentioned, term life insurance is actually surprisingly affordable for a lot of people. Not only that, but getting your own policy gives you way more flexibility. You know, you could shop around with lots of providers and customize a policy that better matches your needs.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
But with a company group life insurance policy, you're generally stuck with whatever options they have available. However, supplemental group life insurance can actually be a big benefit if you're older or have health conditions and only need life insurance for a limited time. So if that's the case, then getting supplemental coverage may be your best bet.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Just remember, if you change jobs, your next employer may not offer supplemental coverage, or if they do, they may have different options or limitations to their plan. So just keep that in mind.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Yeah, so accidental death and dismemberment insurance, often called AD&D, but not to be confused with Dungeons and Dragons, is actually quite interesting. It's a sort of hybrid life insurance and disability policy, but it's not nearly as comprehensive to replace either one of those. So AD&D has two distinct parts to it.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
It's got that accidental death part, which provides a payout to your loved ones if you die in an accident, such as a car crash. Then there's the dismemberment part, which pays you if you suffer an injury that results in you losing a limb or becoming blind or paralyzed. And every AD&D policy is different and covers more or less situations, but those are kind of the broad basics.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
And in terms of workplace benefits, AD&D is similar to basic group life insurance. You know, your workplace often gives it to you for free, and it typically has a coverage amount of one to two times your salary. So you probably already have basic AD&D coverage through your workplace as long as you've signed up for it.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
But like group life insurance plans, you may be able to buy more AD&D coverage through your workplace. And this might be useful if you think you're prone to accidents, like if you have a slightly risky job or a risky hobby, let's say.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Yeah, so there's some overlap there. For example, accidental death and dismemberment insurance won't pay your survivors if you take your own life. And other common exclusions include death or injury from drug or alcohol abuse, criminal behavior, or natural causes. And I mentioned risky jobs and hobbies a second ago.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
It's worth noting that some AD&D policies will actually exclude coverage for deaths resulting from certain high-risk careers or hobbies, such as working in law enforcement or going skydiving. So if you're an adrenaline junkie, you might run into some issues there.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Another thing worth pointing out is that if you die from an accident but not right away, your loved ones may actually not get any payout at all. A, B, and D policies often require the death to have followed a covered accident within a certain timeframe, typically a few months.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Yeah, so that's a great point. I'd say it's better to think of AD&D as a supplement to life insurance rather than a substitute. And that's because it's very limited in what it covers. For example, AD&D insurance won't cover deaths from illness or natural causes.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
And that's pretty significant given that the chances of dying from an illness are actually greater than the chances of dying from an accident. But if you have it for free through work, hey, that's pretty great, right? It's a nice bonus. I just wouldn't put all my eggs in that basket, especially if you have loved ones who depend on you financially.
NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Hey, happy to help.