Risks of Relying on Employer Sponsored Life Insurance
Many companies offer life insurance as a benefit to working for them, much like medical insurance or disability coverage. Your employer may offer it for free, or you may pay a small amount from each pay check, usually just a couple of dollars. The question is, is this free or highly inexpensive kind of life insurance enough and can you depend on it? What other risks do you run by relying solely on your employer sponsored life and not buying additional insurance? Lets dig into the numbers to learn more.
What Employer Life Insurance Offers
To understand if this is enough life insurance for you, you need to understand exactly how much coverage is being offered. The amount differs from company to company, but there are a couple very common amounts that are offered. Commonly you will get:
• $50,000. For whatever reason, many companies offer this amount of life insurance. It is a round number, is big enough to feel significant but not big enough to incur much in actual expense to the employer or create much risk for a life insurance company.
• 1 times your annual salary, or your hourly wage extrapolated to an annual amount. For the vast majority of people, this will be between $25,000 and and $100,000. Usually for more highly compensated people a different benefits package may apply, or there may be a maximum amount of life insurance coverage offered even if your salary exceeds that level.
• 2 times your annual salary. More generous companies offer 2x annual salary, or hourly wage on an annual basis (if you work full time). There may also be maximums that apply, or different offerings for the companies executive team.
• The ability to purchase additional coverage (usually up to $250,000 or $500,000) without underwriting. For a price, some companies will offer the ability to purchase additional coverage without going through the underwriting process.
Term Coverage Ending with Employment
Keep in mind that the life insurance offered through work is not “whole life“, or “cash value” life insurance. It is basically a term policy that expires when your employment with the company ends (with a max age of 65 or 70 oftentimes a provision). For more information about the difference between these policy types, see our whole life vs. term article. If you lose your job, you lose your coverage. You also don’t get any of the benefits of a cash value policy, such as the ability to take loans or surrender it for money. Keep in mind that employer life insurance is not permanent.
You Probably Need Much More Coverage
Even though $50,000 or one times your salary seems like a lot of coverage, in reality it is not. Consider that if you have a family, you probably need to replace your earning power for the rest of your life! If you have another 30 years in the workforce, you probably needs 20 to 30 times your salary realistically to provide for your family. Keep in mind that your family will want to invest any payouts from a life insurance claim conservatively, so do not expect market returns on investment. Plan for them to get about 4% return because a lot should be kept in cash or money market accounts.
To learn more about how much coverage you need, you can visit our life insurance calculator. If your employer offers you the ability to purchase more coverage, you may be able to buy enough, but keep in mind that it is not permanent.
Employer sponsored life insurance is great because it is essentially a form of guaranteed issue insurance. There is no underwriting needed, you are automatically given the life insurance policy without delay if you qualify under the general plan guidelines. The bad part is if you lose your job, you may need to buy life insurance from the marketplace. If you are in bad health and can’t pass a health exam or underwriting process to get a standard policy issued, you may loose what is known as your insurability. Your insurability describes your eligibility to receive life insurance coverage due to your health.
This is an argument for owning life insurance outside of your employer sponsored plan. If you have a change in your health for the worse, you might not be able to buy a standard issue life insurance policy. If you lose your job, you will be left unprotected. If you don’t need a significant amount of additional life insurance apart from your employer offered life, you can buy a small policy with a rider known as a guaranteed insurability rider, which gives you the option to purchase additional insurance without additional underwriting. Don’t underestimate the value of having the ability to cover yourself for the sake of your family.
Expenses are Rising Faster than Pay
In the recent past, expenses for housing, fuel, and food have gone up significantly. Unfortunately, salaries have not kept pace. When you are projecting how much life insurance coverage you need, you need to take into account the future expenses your beneficiaries will need to cover to maintain their lifestyle, attend college, or retire comfortably. Unfortunately if you depend on your life insurance coverage to rise with your salary, it may not keep pace with the rise in expenses you are protecting your family against.
An Employer Can Cancel the Plan
Keep in mind that an employer does not have to provide a life insurance plan. There is no law requiring them to maintain the plan or to prevent them from reducing the coverage it provides. While life insurance tends to be a relatively inexpensive benefit for companies to provide their employees and therefore unlikely to get cut, it does happen. If you are banking on this coverage to protect you for a long time, even if losing your job is unlikely you can’t necessarily depend upon the employer to keep the coverage in place.
Employer Life Insurance is as Close as it gets to Free Insurance
While not technically free because your employer pays, for a lot of employees the life insurance coverage offered through their employer is a benefit that they don’t need to pay for. If you purchase even more coverage as a part of the plan, it is likely to be relatively affordable and probably less expensive than what you would pay if you purchased a policy on your own. Employer provided plans are inexpensive because the risk of a claim payout for an insurance company is relatively low. The coverage isn’t permanent, and the pool of people paying in is large and diverse. Because it is offered to all employees, the risk of adverse selection is relatively low as well. You don’t need to worry about the reasons, but suffice to say that you can probably get cheap life insurance from your employer, especially if you are not in premier health.
This is a good argument for taking the plan through your employer, but it is not a good argument for relying on it. Take the coverage because it is free or at least very affordable, just don’t depend on it.
So Do you Need an Additional Policy?
While every persons individual financial situation is different, it is probably not enough. Most people need much more than 1 times their annual salary to adequately provide for things like their children’s college education or retirement for a spouse, or both. Your family and beneficiaries probably need a lot of coverage in a world of rising expenses. When you combine it with the non-permanent nature of the insurance and no protection against cancellation from your employer, you should consider purchasing additional insurance.