Life Insurance: Who's Responsible, You Or Your Employer?

Life insurance is a benefit offered by many employers to their employees. This is known as group life insurance, and it covers everyone who chooses to participate. While it's a great perk, it's not always enough to meet your needs, and it's not always portable if you leave your job. So, it's important to carefully consider your options and calculate how much insurance you and your family require.

Pros and cons of employer-provided life insurance

Pros:

• Convenience: Opting for life insurance through your employer is simple. Paperwork is often part of your hiring documents, and HR departments are typically on hand to answer your questions.
• Price: Basic coverage through work is usually free or offered at a low cost, making it an easy way to get a small amount of coverage.
• Acceptance: Most basic life insurance plans through work are guaranteed, so even people with serious medical conditions can qualify.
• Early Protection: When you're just starting out or early in your career, you may not have the funds needed for life insurance. Employee life insurance can provide a degree of financial security for those who depend on you.

Cons:

• Coverage is tied to your job: Group life insurance is often not portable, meaning that if you leave your job, you may not be able to take the policy with you. You might be able to convert your group policy to individual life insurance, but the price could go up significantly.
• Limited choice: Coverage through work tends to be a type of term life insurance, and employers typically only work with one carrier. Therefore, you won't find the range of policy options that you might find outside of work.
• Low coverage amounts: If you have dependents or financial obligations, a group life insurance policy could leave you underinsured.
• Premiums aren't fixed: The premiums for group life insurance go up either annually or every five years.
• Not enough coverage for your spouse: Your employer's benefits package may not provide life insurance for your spouse, or the coverage may be minimal.

How much life insurance does an employer provide?

The amount of life insurance provided by an employer varies. The median coverage is $20,000 or one year's salary, but some companies may offer plans that pay two or three times your salary. Many employers provide employees with about $50,000 to $100,000 worth of coverage, or about a year's salary. Coverage amounts are typically capped at low amounts, such as one to two times your annual salary.

The amount of coverage is usually determined by a multiple of an employee's annual salary or it may be linked to their position in the company.

If the amount of coverage provided by your employer is insufficient, you may be able to purchase additional coverage through your group plan. This is known as supplemental life insurance. The amount of coverage available varies among companies but typically maxes out at around $500,000.

Is employer-provided life insurance enough for your needs?

Employer-provided life insurance is a benefit offered by many employers to their employees. It is typically group term life insurance that is offered as part of an employee benefits package. The company covers the cost of the premiums, and the insurance provides a lump-sum payment to the employee's beneficiaries in the event of their death while employed by the company.

While employer-provided life insurance can be a good benefit, there are several reasons why it may not be enough to meet your needs:

Coverage is tied to your job:

If you leave your job, you may lose your employer-provided life insurance coverage. Group life insurance is often not portable, meaning you cannot take the policy with you if you change jobs. Some companies may allow you to convert your group policy to an individual policy, but this could be significantly more expensive.

Limited coverage amounts:

Employer-provided life insurance policies usually have low coverage amounts, typically capped at one to two times your annual salary. If you have dependents or significant financial obligations, this may not be enough to meet your needs. Experts recommend getting coverage worth five to ten times your salary.

Coverage is temporary:

Employer-provided life insurance is usually term life insurance, which is only effective for a specific length of time. If you leave your job or the company stops offering life insurance as a benefit, you could lose your coverage.

Coverage may not include your spouse:

Your employer's benefits package may not provide adequate life insurance coverage for your spouse. Even if it does, the coverage may be minimal. If your spouse is not working or has a lower income, you may need additional coverage to ensure they are protected.

Coverage may become more expensive:

The premiums for group life insurance tend to increase over time, either annually or every five years. If your employer pays for your coverage, the premiums for coverage over a certain amount may also be subject to income tax.

In summary, while employer-provided life insurance can be a valuable benefit, it may not be sufficient to meet your needs, especially if you have dependents, significant financial obligations, or plan to leave your job. You may need to supplement it with an individual policy to ensure you have adequate coverage.

What happens to employer-provided life insurance when you leave a job?

When you leave a job, your employer-provided life insurance coverage will most likely be terminated. This is because employer-provided life insurance is usually group life insurance, which is tied to your job.

Portability and Convertibility

Some employer-sponsored life insurance plans are portable or convertible. Portable plans allow you to take your policy with you when you leave the company, but you will probably face higher premiums. Convertible plans allow you to switch your group coverage to an individual plan, like whole or universal life insurance, but the premiums will likely increase.

Actively-at-work Clause

Many group life insurance policies come with an "actively-at-work" requirement, which means that if you're not on the job—whether you quit, were fired, or are out due to illness or injury—your coverage could vanish.

Employer Obligations

Your employer is required to inform you of your coverage termination and any options you may have. They must send you a letter explaining when you will lose your life insurance coverage. You are responsible for adhering to strict deadlines for converting or porting your group coverage.

Maintaining Coverage

If you want to keep your policy and are unable to port your coverage, you may be able to convert your group policy to an individual policy if your plan allows. However, you will be responsible for paying the entire premium out of pocket.

Should you get life insurance outside of work?

Life insurance is an important part of financial planning, and it's natural to wonder if you should get life insurance outside of what your employer provides. Here are some things to consider when making that decision:

Understand the benefits of employer-provided life insurance

Employer-provided life insurance, also known as group life insurance, is a popular benefit offered by many companies. It is typically provided at no or low cost to the employee and can be a convenient way to get some coverage. The application process is often simple, and most plans offer guaranteed acceptance, even for those with pre-existing health conditions. Additionally, premiums are usually affordable as they are based on the overall health of the group rather than the individual.

Consider the limitations of employer-provided life insurance

However, employer-provided life insurance also has several limitations. Firstly, the coverage amount is often low, typically capped at one to three years' salary. This may not be sufficient if you have dependents or significant financial obligations. Secondly, employer-provided life insurance is usually temporary and tied to your job. If you leave your job, you may lose your coverage, as it is not always portable. Additionally, the coverage amounts and features are predetermined by the employer, limiting your ability to customize the policy to your specific needs.

Evaluate your personal circumstances

When deciding whether to get life insurance outside of work, carefully consider your personal circumstances, including your age, health, financial obligations, and dependents. If you are young, single, and have minimal debt, the coverage provided by your employer may be sufficient for your current needs. On the other hand, if you have a family, a mortgage, or other financial commitments, you may require additional coverage to ensure your loved ones are adequately protected. Additionally, consider the possibility of future life changes, such as marriage, having children, or taking care of aging parents.

Supplementing your coverage

If you find that your employer-provided life insurance does not meet your needs, you have the option to purchase supplemental coverage. This can be done through your employer's plan, if available, or by acquiring a separate personal policy. Supplemental coverage can provide the additional protection needed to ensure your loved ones are taken care of in the event of your death.

In conclusion, while employer-provided life insurance is a valuable benefit, it may not always be sufficient. By evaluating your personal circumstances and financial goals, you can make an informed decision about whether to get life insurance outside of work to ensure you have the appropriate level of coverage.

Frequently asked questions