Every fall, emails from HR start piling up in your inbox, outlining the various medical, vision, dental, life insurance, and disability benefits available to you in the coming year. While many employees focus on the medical plans or default to the same elections they had in years past, one of the areas we get the most questions about during Shell’s Open Enrollment period is life insurance – do I really need it? How much should I buy? Will it cover my family? Can I keep it if I leave the company? Well, let’s dive into what Shell offers to see if we can address some of those questions.
Every year, Shell’s annual enrollment period is from late October through the early weeks of November. During this period, you can make elections for your medical plans, life insurance, and disability insurance coverage through Netbenefits here.
Alongside the various disability insurance options available to you, Shell offers full-time employees the opportunity to purchase life insurance coverage through its Group Life Insurance Program. You can choose to purchase insurance coverage for yourself, or you can elect coverage for your spouse or eligible children. However, if you and your spouse both work for Shell, you must each enroll separately.
Because Shell doesn’t automatically cover any life insurance premiums for employees, you have the option to purchase coverage in various increments equaling up to 7x your annual base pay, up to a maximum benefit of $4 Million. If you choose an amount exceeding 5 times your annual base pay, MetLife requires that you are actively working before starting coverage and evidence of eligibility subject to their approval.
Something to consider when deciding how much to buy is the life insurance payout’s taxability. When you pay for life insurance premiums using after-tax dollars (via payroll deductions, for example), the payout your loved ones receive when you pass away is tax-free. Since Shell doesn’t cover life insurance premiums for employees, this impacts how much you may choose to purchase when evaluating your family’s cash flow needs. Working with a fiduciary advisor who can help you determine the right insurance needs for your family and the tax impact of that purchase is crucial so you have the right coverage for your financial plan.
During Open Enrollment, many assume the best choice for life insurance is going through Shell’s group. But, is it?
There are benefits to going through Shell’s program for group rates, however, for some, it may be better to purchase your own term insurance instead. One of the key considerations we look at with our Shell clients is the cost of these plans. Because of the size of Shell, group plan costs may be lower than what you can find in the open market. Shell offers a handful of options to consider rather than having an overwhelming amount of choices, and these policies are portable if you choose to leave Shell or retire.
If, however, you’re extremely healthy for your age group, you may be able to purchase a cheaper term policy than what’s offered through Shell and find one more customized to your needs in the open market.
While we know how much you CAN buy, the real question to address is how much SHOULD you buy. Often, we see Shell professionals who are incredibly underinsured or who have overpurchased life insurance for a variety of reasons.
Let’s walk through a few examples to illustrate how we evaluate the right amount of insurance for various stages of life. For each example, we’ll assume 8% annual returns on investments and no changes to expenses after a spouse’s passing.
Adam and Erica are 40 years old with two young kids. After working with a financial advisor, they know that they need to work until age 60 to reach financial independence. If Adam passes away unexpectedly and they had Group Life Insurance coverage up to a $500,000 benefit – what does that mean for them? Because there was only one income, between their savings and the life insurance benefits, the funds will only cover Erica and the children for 13 years if there’s no change in annual expenses.
Then, what? Erica’s options are limited:
To avoid this conundrum, we would’ve advised Adam to purchase more life insurance to provide for his family if he were to pass early. Without it, there’s a gap in insurance and income protection, which is a simple fix during Shell’s open enrollment period.
Let's consider a different scenario. Sarah and Nick are 50 years old with no children. They are high-income earners and super-savers who kept their expenses low for most of their lives, so they’ve already reached financial independence.
To maintain their lifestyle in case of an untimely death, they elected to pay for additional life insurance coverage of 5x Sarah's base salary. Is this enough? Is it too much?
Based on our calculations, they’ve purchased way more insurance than either Sarah or Nick would need to uphold their current lifestyle if one of them passed early. When determining how much insurance is “too much,” we need to look at Sarah and Nick’s goals and uses for the insurance funds. Are we just trying to help maintain the same lifestyle after one of them passes, or do they have additional goals that require more funds?
Suppose Sarah and Nick want to give a substantial amount to charitable causes or pass assets on to their extended family. If that’s the case, their insurance coverage could help them do that effectively. However, if the goal is just to maintain a comfortable lifestyle after one of them passes, limiting coverage to 3x or 4x, instead of 5x Sarah’s base salary is likely sufficient for coverage.
Lastly, let’s look at Logan & Erin. They are 60 years old with adult children. They have $4 million in investable assets and savings as Logan starts thinking about his impending retirement from Shell. Logan makes approximately $250,000 a year, and their household expenses are $150,000. When a family is this close to retirement, the key question we ask when assessing insurance is: Are they financially independent?
If Logan and Erin have enough to comfortably retire, it raises the question of whether or not they need any life insurance. We typically think about life insurance as a means of replacing income or “human capital.” When we look at how much they have in portfolio assets and their annual spending, Logan and Erin are financially independent and don’t need life insurance.
Insurance is an important part of financial planning, and making the proper elections for coverage during your Annual Enrollment period is crucial. The right amount of insurance coverage can help protect you from financial loss in the event of an unexpected event, such as a death, illness, or accident. While ensuring you're correctly handling all these pieces may seem daunting, you don't have to do it alone.
Unlike other firms, we don't sell insurance, so we can focus on finding the right plans and amounts needed for our clients without any conflicts of interest. As a Registered Investment Advisory firm (RIA), we're held to the fiduciary standard to work in our client's best interest and make insurance recommendations based on individual needs and goals. At Willis Johnson and Associates, we believe that insurance should be part of a comprehensive financial plan. Our firm focuses on comprehensive financial planning and ensuring that strategies like evaluating insurance gaps are correctly executed to help our clients reach their financial goals. We work with our clients to assess their individual needs and goals, and then develop a customized plan that includes insurance as one of the key components.
At WJA, we look at all your financial pieces to ensure nothing gets overlooked or left on the table. Working with a financial advisor is a beneficial way to determine if this or other tax-efficient savings strategies can help you reach your long-term goals. Start the conversation with an advisor today.