Is Your Employer-Provided Life Insurance Coverage Enough?

What Is Employer-Provided Life Insurance?

Employer-provided life insurance is group term life insurance that may be offered as part of your employee benefits package. If available, it is an option for all of a company's employees.

Term life insurance provides a death benefit for the insured's beneficiary. It remains in effect only for a specific length of time. For employer-provided term life insurance, that effective time period is while an employee remains employed by the company.

The amount of coverage is typically determined using a multiple of an employee’s annual salary. Or it may be linked to an employee's position at the company. Usually, employers pay most or all the premiums. 

Employer-provided life insurance can be a good benefit, especially if you have no other life insurance in place. Bear in mind, though, that it applies only to the employee, and not to their spouse or children. Also, it’s important to consider whether the coverage offered is sufficient to meet your financial needs.

Learn how to determine whether you should buy an additional individual life insurance policy outside of your employer and about the risks of relying only on an employer-provided plan.

Benefits of Employer-Provided Life Insurance

Convenience: If employee life insurance is made available to you by your company, starting coverage is simple. Just opt in.

Savings: Because employers usually pay for all or most of company life insurance premiums, employees can save or use for other needs the money they would have spent on coverage.

Acceptance: Most employee life insurance plans are guaranteed, meaning you'll be accepted whether you have serious medical conditions or not.

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.

Added Coverage: You can usually increase your coverage as life events and needs change. An employer may offer the option of paying an additional premium amount to increase basic protection.

Riders for Extra Protection: An employer may offer riders (e.g., for certain degrees of illness and disability) to your basic policy that you may purchase for added protection.

Reasons Why You May Want Additional Life Insurance

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 coverage may not be enough to meet your needs. Many employers provide employees with about $50,000 to $100,000 worth of coverage, or about a year's salary.

If you have dependents who rely on your income, then you may require additional coverage to provide for their needs in the event of your death. Some experts recommend getting coverage worth five to 10 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, Ariz. “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.”

On the other hand, not everyone needs life insurance. If you have no dependents or have an alternative plan for providing for them, your employer’s group life insurance might be sufficient. You may simply rely on the group life insurance, for example, to cover your funeral expenses or debts.

You Can Lose Your Coverage If Your Job Situation Changes

As with health insurance, you want to avoid gaps in your life insurance coverage. If you change jobs, are laid off, or are reduced to part-time status, then you could lose your employer-provided life insurance.

Some policies do allow you to convert your group policy to an individual one, but it likely would be more expensive.

You 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, Mass. However, if you can no longer get medically underwritten for new insurance, you may want to opt for the conversion regardless of price, he said.

Even if you don’t leave your job, not having additional coverage can be a risk because of the possibility that your employer stops offering life insurance as a benefit.

Getting Coverage Is More Difficult When Your Health Declines

If you’re leaving your job because of a health problem or if your health has declined, you may struggle to get new insurance because insurers factor in your health when they approve you for a policy. A medial exam is a standard part of the process of applying for most life insurance policies.

“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, Colo.

At that point, it may be too late to purchase your own policy at an affordable rate, if you can get one at all, Saulnier says. So, having additional coverage outside your employer's plan can minimize the risk that you won't qualify for coverage when you need it.

Your Plan Doesn’t Provide Enough Coverage for Your Spouse

Your employer’s benefits package may not provide life insurance for your spouse. If it does, then the coverage may be minimal.

"Families can often suffer economic hardship if either spouse dies, not just the primary breadwinner dies," says Saulnier. However, in many cases, employer-provided insurance does not adequately insure the spouse of the employee.

Employer-Provided Life Insurance May Not Be Your Cheapest Option

Even if you feel that the life insurance coverage from your employer is sufficient, consider shopping around to see if your employer’s insurance really offers the best value.

The younger and healthier you are, the more likely you will be to find a better rate elsewhere. The coverage provided by employers tends to get more expensive as you age. In contrast, you can purchase guaranteed level-premium term life insurance that costs you the same amount every year for as long as you have the policy.

“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.”

Supplement Employer-Provided Life Insurance With a Policy of Your Own

Taking advantage of any free or inexpensive life insurance offered by your employer is often a wise financial move, but it may not be in your best interest to rely on it for your only life insurance coverage. Depending on your circumstances, you may want to buy additional coverage.

You can purchase other life insurance policies, such as an individual term life policy or a permanent life policy. Term life insurance offers lower premiums, but is only effective for a set period of time. Whole life policies (a type of permanent life policy) tend to have higher premiums, but they remain in effect until your death and can provide a cash value component.

In general, aim to buy the most insurance for your needs that you can afford at the youngest age. As you get older, your health could decline and your premiums could increase.

How Much Supplemental Life Insurance Is Necessary?

Life insurance needs are unique to an individual's financial situation, including their dependents and budget. One way to determine how much coverage you need is to multiply your annual salary by a certain factor. Many financial advisors recommend about five to 10 times your annual salary in coverage.

For an estimate tailored to your needs, consider first how much of your annual income that your dependents rely on and how many years they are likely to need it. For example, if you have very young children, then you will need to replace more years of income than if your kids were teenagers or older.

So, for instance, if your family should need $100,000 a year for 10 years to cover their living expenses, then ideally, you should have at least $1 million in life insurance.

Also, consider any large expenditures beyond your dependents' everyday needs. For example, if you expect to pay for your children's college education, then factor in those costs.

Once you've decided on how much life insurance you need in total, consider how much coverage your company life insurance provides and then purchase a supplemental policy to make up the gap.

The Bottom Line

Company life insurance, or employer-provided group term life insurance, offers employees a convenient and easy way to get some degree of protection for their dependents by simply signing up for it.

The amount of coverage provided through such programs may not meet all your financial needs and won't continue to cover you should you leave your employer. However, company life insurance can be worth opting into for its fast access to coverage and savings on premium costs.

Should you find that more is needed, you may be able to get additional coverage through your company plan. Or, you can purchase a supplemental plan outside of your company.