Is Life Insurance Through Work Enough?

Most professionals who work at a private company, non-profit, or government entity have some level of free life insurance. Examples include the University of Colorado, the federal government, and IBM Corp., where employees have subsidized or free term life insurance. It’s a nice perk to have, but you may wonder if you should purchase more life insurance beyond work. We’ll consider this important question and also examine resources for finding insurance on your own.

Most employer-provided life insurance benefits are so-called term life insurance policies. Term policies do not have an investment component in the form of a cash value. It’s as straightforward as life insurance can get. If the insured dies when the policy is in force, then the beneficiaries on file with the insurance company will receive the death benefit. The beneficiaries of the policy are not necessarily people mentioned in the will, so it’s important that they are up to date and accurate. (For more, see: 6 Questions to Ask a Financial Advisor.)

Life Insurance Options

As life insurance agents often recite, term policies are not good solutions for permanent life insurance needs. If you require a policy that will pay off upon your death no matter your age, then a guaranteed cash value policy may be the best option for you. However, most people don’t require life insurance for the rest of their lives. If you are married in your 30s with kids, then it may be appropriate to have coverage until they are through college and your retirement savings are complete. This may be a temporary need for the next 25 years rather than one that would continue for more than 50 years.

Term life insurance is the least costly option for a temporary life insurance need. And employer policies have the advantage of offering a basic level of coverage for free in most cases. But if you have a spouse, children, or other dependents that would suffer financially if you were no longer around, then basic work term policies are generally not sufficient.

Determining an appropriate death benefit for life insurance is not a simple proposition. However, there are rough guidelines that we can use so we can get an idea of your life insurance need. Ten times your current income is a good starting point, which would mean someone earning $100,000 annually should purchase insurance with a death benefit of $1 million. Even with this rough estimate, know that almost all employer life insurance plans fall short of the true need.

In most cases you can opt to purchase more life insurance from your current employer. In our experience this only makes sense in the rare case you have an adverse health condition or family history, and are able to purchase additional employer life insurance without going through underwriting. (For more, see: The Advantages of Indexed Universal Life Insurance and How Annuities Can Boost Your Retirement Confidence.)

Purchasing It Privately

Buying your own term policy means it can be kept in force even once you leave your employer. After all, just because you leave a job doesn’t mean that your need for life insurance has ended. Also, employer life insurance generally goes up in cost as you get older. Level term life insurance purchased privately will keep the same premiums during the length of the term.

Term life insurance is also priced at a rate that most can afford with a death benefit sufficient to meet their needs. Take a 35-year old male who wants 20-year level term insurance with a $1 million death benefit. We’ll assume he’s in the second healthiest underwriting class for this exercise. The monthly bill for this coverage could be in the $50 to $60 range, would not increase during the life of the term, and could be converted to permanent insurance in case it were needed.

Independent insurance agencies can supply quotes from many different companies and are a good resource. Employees of some “captive” insurance companies will offer good products as well. Taking the step of covering the needs of the ones you would leave behind is not easy. But your efforts to secure a life insurance policy outside of work should pay off in better peace of mind for your family and you. (For related reading, see: When to Update Your Life Insurance Beneficiaries.)