As part of your employee benefits package, you employer may provide some group term life insurance. While that's a nice perk, especially if you have no other life insurance in place, it's important to consider whether it's sufficient to meet your financial needs. What's more, relying entirely on your employer's insurance plan to cover you can pose other problems.
- Many employers offer a certain amount of group term life insurance as part of their employee benefits package.
- If you have this benefit, your employer may pay for some or all of the premium costs.
- You may also be able to buy additional coverage at your own expense.
- But getting all of your life insurance where you work can put your family at risk if something happens to you.
Problem 1: Your Employer May Not Offer Enough Life Insurance
While basic employer-provided life insurance is usually low-cost or free, and you may be able to buy additional coverage at low rates, your policy’s face value still may not be high enough. If you have dependents who rely on your income, you probably need coverage worth at least six times your annual salary. Some experts even recommend getting coverage worth 10 to 12 times your salary.
“Most people are able to buy an additional four to six times their salary in supplemental coverage over and above what’s provided by their employer," says Brian Frederick, a certified financial planner (CFP) with Stillwater Financial Partners in Scottsdale, Arizona. “While this amount is sufficient for some people, it isn’t enough for employees that have non-working spouses, a sizable mortgage, large families, or special-needs dependents.”
What's more, simply multiplying your salary may not be enough to replace your actual income. “Death benefits that replace salary do not take into account bonuses, commissions, second incomes, and the value of additional benefits such as medical insurance and retirement contributions,” notes Mitchell Barber, a financial services professional at the Center for Wealth Preservation, a Syosset, New York-based agency of MassMutual Financial Group.
On the other hand, your employer’s group life insurance might be sufficient if you’re single or if you have a spouse who isn’t dependent on your income to cover household expenses and the two of you don’t have children. If you’re in that situation, you may not need life insurance at all unless you want to cover your funeral expenses or have debts, such as cosigned student loans, that you don't want to leave behind for someone else.
Problem 2: You Can Lose Your Coverage if Your Job Situation Changes
As with health insurance, you don’t want gaps in your life insurance coverage because you never know when you might need it. If you change jobs, are laid off, or are reduced to part-time status, you could lose your employer-provided life insurance.
Lack of portability can be a problem if you aren’t going directly to another job with similar coverage and aren’t healthy enough to qualify for an individual policy. Some policies do allow you to convert your group policy to an individual one, but it will likely become much more expensive. And if you’re losing your coverage because you were laid off, the premiums might be unaffordable.
“Since the products that are available for conversion from an employer-provided plan are typically limited to just one insurance carrier’s offerings, a client can generally find a more cost-efficient insurance policy outside of the employer’s plan,” says Thaddeus J. Dziuba III, a life insurance specialist for PRW Wealth Management in Quincy, Massachusetts.
“This presupposes that the client can obtain favorable underwriting, however. As a rule of thumb, if a client can no longer get medically underwritten for new insurance coverage but still has a financial need for the death benefit provided by his or her company’s plan, then we often advise conversion regardless of price, since it will be unlikely that they can obtain coverage elsewhere,” he adds.
Even if you don't leave your job, there's also the risk that your employer could stop offering life insurance as a benefit to save the company money, leaving you without coverage.
Problem 3: Coverage Gets Tricky if Your Health Declines
Another problem arises if you’re leaving your job because of a health problem. “If you rely solely or heavily upon group insurance, and then suffer a medical condition that forces you to leave your job, you may be losing your life insurance coverage just when your family is going to need it the most,” says Jim Saulnier, a CFP with Jim Saulnier & Associates in Fort Collins, Colorado. At that point, it may be too late to purchase your own policy at an affordable rate, if you can get one at all, he says.
Even if your health problems aren’t significant enough to stop you from working, they might limit your employment options if you only have life insurance through work. “You could end up handcuffed to your job to keep the life insurance if you experienced a serious enough health issue,” says David Rae, a CFP and vice president of client services for Trilogy Financial Services in Los Angeles.
Problem 4: Your Plan Doesn’t Provide Enough Coverage for Your Spouse
While your employer’s benefits package probably offers health insurance for your spouse, it won’t always provide life insurance for them. If it does, the coverage may be minimal—$100,000 is a common amount, and that doesn’t go far when you lose your husband or wife unexpectedly.
Couples often assume the family will only suffer economic hardship if the primary breadwinner dies, says Saulnier, and as a result, many workers fail to adequately insure their spouses. But the death of a non-working or lower-earning spouse can put great demands on the family's income. “I often say rhetorically to a client, if your [partner] dies on Saturday are you going back to work Monday morning? Do you have ample PTO [paid time off] on the books to cover an extended leave?”
What’s more, says Barber, “When one parent is absent, the other must take up the slack with daycare or chauffeuring. Hours are cut back. There is never time to properly grieve and, as survivors are often depressed, productivity often falls.”
If your current employer-sponsored coverage doesn't offer a sufficient death benefit for your spouse, you may need to purchase a separate policy for them. But if they're also employed, they can first check to see what kind of life insurance benefits their workplace offers.
Problem 5: Employer-Provided Life Insurance May Not Be Your Cheapest Option
Even if you can get all the life insurance you need for both yourself and your spouse through your employers, it’s a good idea to shop around to see if your employer’s insurance really offers the best value for the money. The younger and healthier you are, the more likely you will be to find a better rate elsewhere. Also, unlike the guaranteed level-premium term life insurance you can purchase individually, which costs you the same amount every year for as long as you have the policy, the coverage provided by your employer tends to get more expensive as you age.
“Employer coverage starts out being very cheap prior to age 35 and then rapidly increases in price,” says Frederick. “Most policies increase every five years and become incredibly expensive once the employee turns 50. If you are healthy and a nonsmoker, buying a stand-alone policy might be cheaper than taking coverage through your employer.”
“Employees who are too unhealthy to qualify for life insurance on their own tend to overload the group insurance because there is no underwriting, and life insurance companies make up for it by charging higher premiums,” Saulnier explains. As a result, the healthy people in group policies may pay more than they would if they purchased private policies.
The Solution: Supplement Employer-Sponsored Life Insurance With a Policy of Your Own
While there’s no reason not to take advantage of any free or inexpensive life insurance your employer offers, it probably shouldn’t be your only insurance. Nor should most people rely entirely on the additional life insurance they can buy through work.
The solution to each of the problems described above is to purchase some of your life insurance directly in the form of an individual term life policy. Term life insurance is designed to cover you for a set period of time—such as 10, 20, or 30 years—and it's generally much more affordable than permanent life insurance.
You might need to purchase as much as 80% of your life insurance on your own to have enough and to make sure you’re covered at all times and under all circumstances.
Barber believes that, on the whole, the most affordable solution is to buy the most insurance you can afford at the youngest age, since, as you get older, the chance of acquiring an illness goes up, and with illness comes more expensive premiums, if you can qualify for a policy at all.
How Much Supplemental Life Insurance Do I Need?
As mentioned above, there are a number of rules of thumb for how much life insurance you need in total, such as multiplying your current salary by six, eight, 10, or more. While those guidelines can be better than nothing, they may also be way off the mark, depending on your circumstances.
If you'd like to come up with a more precise, individualized estimate, first consider how much annual income your dependents rely on from you and how many years they are likely to need it. If, for example, you have very young children, you will need to replace more years of income than if your kids are teenagers or older.
So, for instance, if your family would need $100,000 a year for 10 years to cover their living expenses if you were to die tomorrow, you should ideally have at least $1 million in life insurance.
Also consider any large expenditures beyond their everyday needs that your survivors are likely to face. For example, if you expect that your kids will be going to college one day, figure those costs into the equation, too.
If you have other assets that your family will inherit, such as investments or money in retirement accounts, you may need less life insurance than otherwise. But, if you can afford to, it's better to err on the high side when estimating your needs, in part because inflation could erode the value of your policy over time.