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Wealth Building Strategies Your Advisor Didn’t Share With You

Many people don’t know (and probably don’t care) that September is Life Insurance Awareness Month. It’s the one month out of the year that life insurance gets it’s time in the sun. To pump up this incredible product, I want to share some alternate uses for life insurance that many advisors never share with their clients.

1. The Roth Alternative

The “Roth” IRA was created back in 1997 and it was setup to provide an individual with tax-free money during their retirement years. Other employer-sponsored retirement plans (401k, 403b, 457b, etc.) also adopted the Roth feature. Currently, if you have an IRA or employer-sponsored retirement plan that has “Roth” in front of it, you’re telling the IRS to tax the money that’s currently being contributed into that account. And, if you follow a few simple rules, you can receive your distributions tax-free during retirement.

There were only two problems with the Roth IRA specifically: 1) if you earn too much money, you are not allowed to open one and 2) the contribution amounts are limited (2020 limits – $6,000 if you’re under age 50, $7,000 if you’re 50 and over). Income limits don’t apply to the employer-sponsored plans and the contributions limits are higher than an IRA but they still have a cap.

With these problems known, people began to search for another way to invest their money for retirement with the hopes of receiving tax-free money during their retirement years. The solution – a properly structured permanent life insurance policy.

2. Create Your Own “Bank”

For starters, you will not have to concern yourself with setting up a physical (or online) financial institution. Also, for the sake of keeping things simple, this strategy involves you utilizing a properly structured permanent life insurance policy. Here are the primary reasons people consider creating their own “bank” or what some call the “family bank”:

  1. The cash value usually earns a much better growth rate than any solution you would find at your financial institution (High-yield savings/checking or CD’s).
  2. The growth, as well as distributions you take, are not taxed as long as a small amount of death benefit stays in force until you pass away
  3. When you borrow money, your full cash value continues to grow inside the policy despite any loans you have against the policy

For each of the alternate uses of life insurance I’ve shared with you, I highly recommend that you speak with a financial advisor or insurance agent. These strategies are not typically shared with the general public. So, once you do connect with a financial advisor or agent, you will now be equipped with some good material to discuss at your next appointment.

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The #BuildWealth Challenge Results Are In

How did this #buildwealth challenge come about? Simple…I was trying to determine what financial areas were causing the most issues for people. Was it a lack of understanding of the complexities of the various insurance and investment related products? Or was it dealing with basic money management skills and credit. I set out to see if I could get 500 people (ended up with 510) to respond to my brief survey.

Please note that I am not an academic and this research project wasn’t as thorough as I would have liked. I didn’t capture any detailed demographic information (got plenty of feedback about that), however the respondents of this survey come from a variety of age ranges, ethnic backgrounds, educational backgrounds, professions, etc. Despite all of that, I think the results we very revealing about the relationship people have with money. I do have plans for future #buildwealth challenges and I will most certainly do a better job of capturing more detailed information.

Without further ado, let’s jump into the results!

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I know some may argue that they track their financial success some other way, but I felt strongly that someone’s net worth tells the “real” story. You can determine your personal net worth by using a simple formula, Assets – Liabilites = Net Worth. This formula can be found on an important financial document called a balance sheet. Please familiarize yourself with this document because it’s a great first step to getting your financial house in order. By its very nature, completing a balance sheet will require you to gather all of your financial information as it applies to what you own (assets) and what you owe (liabilities). Think of this (taking inventory) as the all important first step on the road to financial rockstar status.

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For starters, the fact that two people skipped this question is kind of crazy. I’m not really sure what to make of it. And, for the 9% who put “neither”, that intrigued me because it says a couple of things; 1) they don’t have the slightest clue about where their money goes on any given month or 2) they just don’t care about knowing where their money goes. The question is simple…who is control, you or your money? People feel like they are living check to check because they haven’t taken the time to do some form of a budget, which would provide some level of control. If the old school way of budgeting doesn’t work for you, try the 50/20/30 plan or some other budgeting method. The key is to figure out what method works for you and stick to it. Also, don’t be so hard on your self if you can’t master the budget right away. Keep in mind that you have to crawl before you can walk.

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Understanding the importance of credit is critical to living a decent life in this country and I was happy to see that over 60% of the respondents were in the good/great category. For the small percentage who stated they have “no idea” about their status, my hopes are that they at least excercise their rights by obtaining one free credit report (no score) from each of the three credit bureaus once a year. The interesting thing about credit is that you can screw it up, then clean it up, then screw it up again, then clean it up again. And you can repeat that for as long as you would like. But, once you clean up your credit, unless there are some unforeseen circumstances (i.e. job loss, divorce, becoming disabled) it should not be that hard to maintain a positive credit standing.

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This question wins the prize for “most skipped” and that wasn’t a big surprise. The way the question is phrased probably has something to do with it, as I didn’t specify what type of insurance. Plus, most people don’t truly understand why insurance is the cornerstone of their #buildwealth plan until something goes wrong. Let me ask a question. If you were going to build a house, where would you start? If your answer was anything other than the foundation, we need to talk! When it comes to building a home, a solid foundation sets the tone for the remainder of the house. In regards to your #buildwealth plan, not having a strong insurance foundation may jeopardize your saving, investment and retirement plans. If you were to get seriously sick or injured, your bills don’t stop just because you’re not working. Unless you have adequate savings, I seriously hope you have the proper amount of disability insurance. How about if your spouse/significant other (who happens to be the breadwinner) dies unexpectedly? Again, unless you have savings or some other assets that you can liquidate immediately, I seriously hope you have enough life insurance. I’ll stay away from medical insurance because I know everyone who has medical coverage is grateful. Clearly, the insurance conversation isn’t a fun one to have but hopefully I’ve shed some light on how insurance can affect your overall financial well being.

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There’s going to be a day when you don’t want to get up and go to work. When that day occurs, hopefully you have more than enough money to survive. Retirement, whether you’re just starting your career, a seasoned professional or your winding things down, should be on your radar. The younger you are, the more time you have, the older your are, the less. It’s scary to know that some people have worked 30 or 40 years and have nothing to show for it. Or they are in their early 70’s or even 80’s and they “have” to work because they can’t afford not too. Having your retirement plan in order is of the utmost importance. Back in the day, your employer typically took care of retirement planning for you, however, the responsibility now falls on your shoulders. Many companies have done away with pension plans (because they are expensive to manage) and the long-term viability of social security seems to be an issue, but I’m optimistic that our government will figure out how to make it last. There are some employers who don’t provide a retirement account, and that’s okay, because there are plenty of avenues for you to open one up on your own. There isn’t a good excuse as to why you shouldn’t have an account (be it with your employer or on your own) that’s dedicated to retirement. And if you are one of those people who is struggling with the question of “how much should I save for retirement”, the answer is simple…A LOT!

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Risk is another area that more of us need to discuss when thinking about our #buildwealth plans. Let’s get one thing clear, there is risk in every single type of account that exist. The big question when it comes to risk is how much can you tolerate? If you’ve ever worked with an investment professional or opened any type of investment account, you’ve taken a risk questionnaire. Some experts will say that if you’re young, you should be aggressive and if you’re older, you should be more conservative. And of course there is everyone else in between. The theory makes sense because if you’re young and you’re investing aggressively for the long-term, despite the ups and downs of the market, you will probably be satisfied with the growth in your account. Just search any historic data about the long-term performance of the stock market and you will understand. On the flip side, when you’re older, you may be relying on those funds to live, thus it’s all about preservation. You might not be able to live comfortable if a major dip in the market occurs and your account balance is cut in half. Managing risk will ALWAYS be a work in progress for everyone. Life will cause you to think differently about risk. When you’re young and single, you make different choices in relation to someone who is older and has a family. When you’re salary is $150,000/year, you’re investment decisions are different from someone who is earning $80,000/year. When you are an educated investor, you’ll tend to make more riskier investments as opposed to a novice investor. I could go on with examples, but you get the point. Be mindful of the risk that you’re taking and make sure you are the one that’s driving your decisions on risk and not your emotions or some outside influence.

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How Can A Financial Planner Help Me?

Having a conversation about financial matters is a struggle for most people. We all understand that it’s imperative to have your financial house in order, however, most people typically don’t. The fear that you face around this issue will never subside until you decide to take action. You either need to do-it-yourself (which most won’t commit to doing) or enlist the aid of a financial planner.

Financial planners don’t get a ton of fanfare, but they should. The issue stems from the fact that people don’t understand the value that a financial planner can provide. People don’t understand that a financial planner may be the solution to all of their money woes. People don’t understand that a financial planner needs to be cherished just like your barber or hair stylist. Wait…like your barber or hair stylist? Yes!! When you need your hair done for an event or before you go on a trip, you will move mountains to get that appointment. Or if your person doesn’t do appointments, you will wait as long as it takes. Why?? Because looking good is non-negotiable!! However, when it comes to financial matters, you’re okay with NOT taking immediate action and continuing a life of financial misery. There isn’t a sense of urgency when it comes to interacting with a financial planner, nor is there typically an immediate (there are exceptions) outcome received. Thus, people tend to shy away from meeting with a financial planner or they constantly reschedule their appointment.

Now that we’ve addressed the psychology behind why people avoid financial planners, let’s move on and take a look at what you need to consider when you are ready to find your go to person. For starters, whoever you decide on, you actually need to like them. It doesn’t make much sense to do business with someone that you don’t like. Next, it’s recommended that you should interview 2-3 candidates before making your decision. Before finishing that first meeting (which is typically the free consultation that most will offer) you should know exactly how they get paid and what they are capable of doing for you.

Here’s a menu (of sorts) that you should consider when walking into that first meeting. A financial planner usually works in one of 3 ways:

Transactional-based business (Needs Analysis):

Think of this level as the basic package. You need a solution and this planner can sell it to you. The planner will capture the necessary information as it applies to your need, conduct an analysis and will conclude with recommending a solution(s). It doesn’t require much follow up after the transaction is complete. The planner will be in touch at a minimum annually to do a review or may be in touch periodically for service related matters. The planner earns a commission on the solution that is sold.

Managed money (Wealth Management):

This can be considered the “I’m in it with my client” level. You are entrusting the planner to manage a certain amount of money for you. The services at this level may involve the following as it relates to your money: 1) how your portfolio is allocated amongst the different asset classes 2) managing risk within the portfolio 3) enhancing (growing) your portfolio and 4) tax planning. You will probably meet with your planner on a quarterly basis to review your account. The planner will charge a quarterly fee based on the solution chosen and the account size. A fee-based relationship requires the planner to act in the best interest of the client because their compensation is tied directly to performance. Good performance, better pay, poor performance, less pay.

Comprehensive Financial Planning:

This level is like the deluxe service at the car wash. The planner is going to assist you with an in-depth analysis of some or all of the following areas: Net Worth and Cash Flow, Investment Planning & Allocation, Risk Management, Retirement Planning, Income Tax Planning and Estate Planning. At this level you will meet as necessary to help ensure that you understand your financial plan. At a minimum, you will conduct an annual review of your plan. Compensation at this level is two-fold. First, there will be an agreed upon fee for the financial planning service. Second, a commission and/or fees will be earned by the planner if you decide to purchase any solution(s) to implement your financial plan. Some people choose to only have the planner produce their financial plan, pay the fee and opt to implement a solution(s) with another planner.

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Did You Know This About Life Insurance

Life insurance is a dynamic financial vehicle, but most people only refer to it as death insurance. Yes, if you have a policy and you’ve been paying your premiums and you pass away, a sum of money will be paid out. Who or what gets that sum of money is totally up to you.

Many of you reading this might not have known this but people actually use life insurance while they’re alive. Did you know that life insurance can be used to fund a child’s education? Did you know that people utilize life insurance to supplement their retirement income? Did you know that if you borrowed against (taking a loan) your life insurance policy, that in some cases you don’t have to pay the loan back? Life insurance is phenomenal tool but it gets such a bad reputation, however there are so many ways that people can use life insurance while they’re alive. It’s one of the most flexible products that exist, but most people don’t take the time to educate themselves properly.

If you didn’t know about those awesome things that life insurance can do (and that was only an appetizer), perhaps you should schedule an appointment with an insurance agent and let them explain it to you.

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Understanding Your Benefits is Important

When you get a job, your employer may have informed you that aside from a paycheck, you will be receiving some additional benefits. Some of the most important benefits a company may offer comes by way of insurance. For this article, I want to focus on life and disability insurance. Determining what insurance benefits you select will depend on your unique situation. Keep in mind, some employers may give you numerous insurance options to choose from, while others may offer the bare minimum. Nevertheless, read through the entire benefits packet that they give you!

Most people are well aware of the importance of health insurance but not so much when it comes to life and disability insurance. Here’s a recommendation…take some time to truly determine how much life and disability insurance you need. The life insurance that’s offered through your employer is the cheapest that you will find, typically because your employer is fronting most, if not all, of the premium payments for you. You will generally find that they may offer flat rates of coverage at varying cost to you or they may have it where you’re entitled to an amount equal to one or two times your salary. If what they are offering isn’t enough, consult an insurance agent to determine how much additional coverage you need to fill your gap. Having adequate life insurance is of the utmost importance because if your household has two wage earners and one passes away or the breadwinner of your family was no longer here, the remaining family members would most certainly appreciate having money for the final expenses and the ability to maintain their current lifestyle. The grieving phase will be challenging enough, but adding financial troubles into the mix, just makes things that much tougher on your family.

When it comes to disability insurance, the same rules apply. Your employer is fronting most, if not all, of the premium payments for you. Many of us don’t see the value of having disability coverage, but here’s some food for thought. If you were seriously sick or injured and unable to work, how would you pay your bills? If you answered that question by saying you have an adequate amount of emergency funds (3-6 months worth of expenses) saved, then you may be okay. If you don’t have such an amount, then disability coverage becomes your savior. Essentially, it enables you to maintain your current lifestyle. What happens for the majority of people is that they fail to have the all-important emergency fund, which results in them having to tap other resources like their investment or retirement accounts, or credit cards. None of those sources should be utilized if at all possible. Your employer may only offer short-term disability or a combination of short and long-term disability coverage. Remember, read your benefits packet because this is something you need to know. Again, just like with life insurance, if what your company offers isn’t enough, consult an insurance agent to determine how much additional coverage you need to fill your gap. [Just so you know, you will never be able to get 100% disability coverage, primarily because if you could get 100% of your earnings without working, you would never go back to work.]

Having a firm grasp of your insurance offerings through work is critical. There may be gaps within your overall insurance plan and you need to make sure they are filled. Insurance is THE foundation of a financial plan. If you are not adequately protected, then you are putting your investment and retirement accounts in serious jeopardy. Think of it this way, if you were going to build a house, would you start on the second floor? Of course not!! You set the foundation, which allows you to build the remainder of the house. There have been numerous studies conducted about the staggering number of people who are under-insured in this country, please don’t let this be you. If you don’t care about insurance studies, ask a family member or close friend if they or someone they know has been negatively impacted by having an inadequate amount of insurance…then you will understand.

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You Need A Financial Planner

Financial planners were put on this earth for one reason, to help people get and keep their financial houses in order. But so many people avoid financial planners. Why exactly is that? Are you one of those people who thinks you’re better off on your own? Perhaps. Are you the person who says you don’t make enough money, therefore there’s no need for you to meet with one? Or maybe you’re the person who says “I don’t want someone all up in my business.” Whatever your reason, you should seriously consider having a conversation with a financial planner because the data doesn’t lie! As a society, we are seriously failing at financial planning.

If you have some time, go research this piece that the National Association of Personal Financial Advisors published back in 2012. The findings are quite disturbing. In that piece they reference an organization, the National Foundation for Credit Counseling, who conducts an annual consumer financial literacy survey. Take a look at their survey from 2013 and 2014. It should come as no surprise but year after year, the numbers continue to be extremely disappointing. And, if you’re wondering how things are going today, not much has changed. On the flip side, this should encourage any financial planner to continue to reach out to and follow up with their clients, ask those tough questions and challenge their clients to be a better financial stewards.

Financial planning shouldn’t be something that we fear, but something we should embrace. If you are someone who doesn’t have a plan, you need one. If you’re someone who already has a plan, maybe you’re overdue for a review. No matter your situation, having a financial game plan will most certainly guarantee you financial independence (however you define it) at some point in your life. And just like that old adage says, if you fail to plan, you plan to fail.

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5 Important Estate Planning Documents

One of the most valuable gifts you can leave your loved ones is a properly prepared estate plan. During your lifetime you will have worked hard to acquire various assets (hopefully) and when you leave this earth, the choice is yours about who/what gets those assets. However, this won’t happen without the proper planning. Don’t leave it to the state to make decisions about what happens to your assets upon your death. The first thing you should do is touch base with an estate planning attorney, as they will be well versed in the legal requirements for the state in which you reside.

Here are 5 estate planning documents that you should familiarize yourself with:

1.      Last Will and Testament – a will is a legal document which allows you to:

  • Designate who will receive your assets after your death; this avoids having your assets divided according to the state’s formula
  • Nominate an executor; they will manage your estate, pay your expenses, debts, taxes and distribute your estate according to the instructions in your will
  • Nominate a guardian for your minor children

2.      Durable Power of Attorney for Health Care

  • With this document, you name a person of your choice, and who has agreed, to make medical decision for you and to act in your behalf in health care matters is you are unable to make those decisions. This authority expires upon your death

3.      Revocable Living Trust

  • In a revocable living trust, your assets are transferred into a trust, generally administered by you for your benefit during your lifetime and transferred to your beneficiaries upon your death, without the need for court involvement. Your Last Will and Testament, which is supplemental to your trust, covers any assets that have not been transferred into the living trust. A revocable trust allows you to retain control of your assets during your lifetime, quickly transfer them to your beneficiary upon your death and avoid the expense and delay of Probate Court. This trust also helps to reduce or eliminate any federal estate taxes.

4.      Durable Power of Attorney for Property Management

  • This document designates and authorizes a person of your choosing to make financial decisions and manage your assets on your behalf to the same extent and effect as if you were present in person. Durable means that they may also act for your in the event you become incompetent or incapacitated.

5.      Living Will

  • A living will allows you to state your desires regarding the use of life-support devices to prolong your life in the event you are stricken with a terminal illness or when there is no reasonable hope for recovery from an injury or illness.
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5 Planning Tips for the soon-to-be parent

The best time to get money-wise about parenthood should be before a child is born. Most soon-to-be parents are probably thinking about all the glorious elements of being a parent…the snuggling, the baby baths, the feeding, or changing diapers. The last thing newly minted parents are thinking about is making sure their family is setup for financial success. If you are a parent-to-be, preparing ahead of time will enable think through all your options and create a solid financial plan.

1.      Create a (parent) budget

When a child arrives, your family budget will change dramatically. Make sure to factor in the cost of diapers, baby formula, child-care, clothes, toys and the list goes on.

2.      Start an emergency fund

Start saving three to six months of household expenses in an account that you can readily access. For those who wish to be a bit more aggressive, aim for six to twelve months.

3.      Review your insurance coverage

The primary goal is to make sure your family can continue to keep the household going financially if something unexpected were to happen. This will involve conducting a thorough analysis of your life insurance, along with short- and long- term disability insurance.

4.      Think retirement before college

Students have options for funding their education…grants, scholarships, loans and any savings or investments you’ve put aside. You don’t have such a variety of options to fund your retirement, nor can you make up for that time lost. It’s understandable that you want to provide proper funding for your child’s education, but your own financial independence should be the top priority.

5.      Make an estate plan

Make sure your family’s wishes are carried out in the event something happens to you. Your family’s details will end up in court with a judge deciding what he or she thinks is best if you don’t have documents such as a will, trust or power of attorney.

Please make sure to speak with a financial professional as it relates to these tips. Doing so will ensure that you and your family will have peace of mind as it relates to your financial decision making.

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Buy Term and Invest the difference

Many people struggle over which type of life insurance makes the most sense for their situation…term insurance or permanent insurance. The difference between the two comes down to cost. Some experts will say why pay for an expensive permanent policy, when you could buy term (which is way more affordable) and invest those savings into a mutual fund, annuity, stocks, bonds or some other investment vehicle. The idea is that investing that “difference” (premium savings) would replace or exceed the cash value accumulation of permanent insurance.

If you are deciding if this strategy is right for you, you need to seriously consider what best suits YOUR personal objectives and circumstances. Think about this:

  • You may not have the discipline to actually invest the difference.
  • If you need to renew or reapply for your term policy, the cost may become prohibitive as you get older of if you develop health problems.
  • If health problems occur, you could become uninsurable and not even be able to purchase term insurance when it comes time to renew.
  • You need the discipline not only to invest the difference, but also to invest early while the difference between the amount of your term insurance premium and the amount of the premium for your permanent insurance is the greatest. You will need to make up for the dramatic increase in the cost of term insurance at later ages.
  • The investment you choose may not perform as you hoped.

Please make sure to carefully weigh knowledge about your habits and self-discipline along with the benefits, risks, product features, and any current or future charges associated with any insurance and/or investment product before deciding how to address your particular needs. When in doubt, schedule some time with a professional because they can help you sort through all your options and ultimately make the decision that will be in your best interest.

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Life Insurance FAQ

Life insurance is an extremely important product that should be a part of EVERYONE’S #buildwealth plan. Here are some common frequently asked questions as it relates to life insurance.

How much life insurance should I own?

There is no single right answer! Some experts will recommend that you have an amount that is equal to 6 – 10 times your annual gross salary. Others say you should opt to have 2 times your annual gross salary. Coverage amounts are individual and certainly not “one size fits all.” The really nail down how much, it’s best that you meet with a financial professional and complete a personal needs analysis.

When should I review my current coverage?

Your situation has probably changed since you first purchased your life insurance policy. If something were to happen to you today, would your family have enough coverage? Generally, it’s recommended that you meet with your financial professional once a year, however, if you have done any of the following since you purchased your policy, you should review your coverage as soon as possible:

·        Purchased a home

·        Had a child

·        Married, divorced or become widowed

·        Changed jobs

·        Taken out a large loan

·        Started a retirement or college fund

·        Started your own business

·        Began caring for an elderly relative

I already own life insurance, should I purchase life insurance on my spouse?

If your spouse contributes to the family’s annual income, then he or she should have adequate life insurance coverage to help replace his or her income in the event of their death. If you spouse does not earn an income, life insurance can still play an important role in helping to pay for valuable services he or she provides; for example, providing child care, elder care, maintaining the home and running the household. Make sure to meet with a financial professional, who can help you determine the proper amount via a personal needs analysis.

Should I purchase life insurance on my child?

Some people scoff at the idea of purchasing a policy on their child but there are a few reasons you may want to consider it:

1.      You can generally purchase life insurance at the lowest possible premium. If your child were to purchase the same amount of coverage when he or she becomes an adult, the annual cost would generally be much higher

2.      You can help ensure that he or she has life insurance protection for life. If the child develops health problems as an adult, he or she could become uninsurable and may not be able to obtain life insurance coverage. In some families, a grandparent purchases a life insurance policy for the child. Also, keep in mind that some states limit the amount of life insurance that can be purchased on minors.

3.      While it’s not a popular option that is widely discussed, some people decide to purchase life insurance on a child to save money for their college education or some other use. Permanent life insurance policies build cash value, and over time, this could grow into a substantial amount of money.

Do I need individual life insurance if I have group life insurance through my job?

YES! Participating in our group life insurance is a good idea because you may be able to receive life insurance at a lower, group rate. If your group coverage is convertible – meaning, when you leave the company you can convert it to an individual policy without evidence of insurability – the individual policy you convert will generally have high premium cost compared to other policies. If your group coverage ends, you can apply for a new policy, especially if your healthy. Otherwise, you may not qualify or may have to pay higher premiums depending on your age and health status. Group life insurance my not provide an adequate amount of death benefit to meet all of your needs.

Consider supplementing your group policy with an individual policy. An individual policy is one that you own, thus it isn’t tied to your employer and you won’t have to worry about your premiums rising every year. With a n individual policy, you won’t need to wonder whether you still qualify every year or if you will lose your life insurance if you change jobs or get laid off. It’s insurance coverage that stays with you.