Companies aren’t required to offer employees life insurance, so if your employer does, it’s a perk you’re lucky to have, and it’s recommended you take advantage of it. But, is your employer-provided life insurance enough to look after your family? And could you score a better deal elsewhere? Let’s take a look at the advantages and disadvantages of employer-provided life insurance.
Advantages of getting life insurance through your employer:
Lower premiums
Employer-provided life insurance policies are either subsidized or paid for entirely by your employer, providing you with free or cheaper life insurance. Premiums tend to be less expensive as your employer receives group discounts, which reduces the cost per individual. Also, under most employer-provided policies, you can purchase additional coverage at a lower price should your family require a more considerable benefit amount.
Faster and Easier Approval (even if you have less-than-perfect health!)
More often than not, enrollment into employer-provided life insurance is automatic without the need for a medical exam. Meaning that if you have a pre-existing medical condition such as asthma or diabetes, it’s much faster and easier to gain approval with your employer rather than an individual life insurance policy through an external provider.
Convenience
Receiving life insurance through your employer is a convenient option as you avoid the hassle of finding an appropriate plan yourself and never have to worry about paying the bill. If you’re required to pay a portion of the premiums, the company merely deducts the amount from your paycheck in much the same way as your medical costs.
The benefits of employer-provided life insurance sound very enticing. However, there are several concerns worth looking into that could save you money and make life better for your family should anything happen to you.
Disadvantages of receiving life insurance through your employer
Your employer-provided life insurance may not cover your needs
Standard life insurance policies offered by employers are usually set at one to two times your annual salary. Some plans allow you to purchase an additional four to six years times your salary at your own expense. However, it’s worth looking into the costs associated with these optional additions, as well as considering whether you think this would be enough to support your family for the future. Experts at Investopedia recommend getting a policy with coverage between 8 to 12 times your annual salary, depending on your dependents, mortgage, and other debt.
If your employment situation changes, you’ll lose your coverage
Just like health insurance, you don’t want gaps in coverage as you never know what might happen. If you’re laid off, your job status changes from full-time to part-time, or your employer goes bankrupt it’s likely you’ll lose your employer-provided life insurance. Some policies may allow you to convert your group insurance policy to an individual one, but it will more likely be more expensive as permanent policies are more expensive than term policies.
You may be able to find a cheaper deal elsewhere
An individually purchased premium-level term life insurance policy costs the same every year for the life of the policy, while employer-provided policies tend to get more expensive as you age.
If you become seriously ill, coverage becomes difficult
In order collect payments from your employer-provided life insurance policy you must be employed by the company at the time of your death. This seems straightforward enough. However, it’s important to realize that most people fall seriously ill before passing away and often spend a significant amount of time in a hospital, without the possibility of working.
For example, if you were to get cancer, you would need to take time off for treatments. Similarly, if you were seriously injured in a car accident, you may never be able to return to work. In most cases, your employer has no other choice than to terminate your employment, which also effectively ends your life insurance policy when you need it most. If you were to pass away, your family wouldn’t receive a death benefit to cover funeral costs, medical bills, and other expenses.
However, if you make a full recovery, you’ll want to obtain a new life insurance policy. Hopefully, you can obtain life insurance with your previous employer or with a new company, but if you can’t, purchasing your own individual policy will be significantly more expensive now that you have a pre-existing condition.
Your employer can alter or even terminate the policy
As the contract of an employer-provided life insurance policy is between your employer and the insurance company, you don’t have a great deal of control. Your employer can make changes to the policy, often without your consent. They can also swap to a lower-rated insurance company to reduce costs, or even remove life insurance from their benefits package without notice. Be sure to check the A.M. Best credit rating of the insurance company to check their financial stability and capacity to payout your life insurance claim.
Importance of a supplementary life insurance policy
While nothing should stop you from reaping the benefits of any free insurance offered by your employer, it’s also a smart idea to diversify your options, so you don’t have to rely heavily on one policy should anything happen to you.
A solution is to purchase an individual term life insurance policy as a supplement to what your workplace already covers. Individual plans offer greater benefits, can be tailored to your needs, and remain in place regardless of your employment status. Term life offers the lowest rate and provides coverage for a specified period of time, such as 20, 30 or 40 years. Once the term finishes you have the option to renew the policy, usually at a higher cost due to age-related increased in risk of illness.
Choosing the right life insurance
The bottom line is that you need enough life insurance to cover your debts and provide for your loved ones in the unfortunate event that your no longer around to care for them. The amount needed varies from person to person, and you need to consider a variety of costs ranging from your mortgage and credit card debt to your children’s education. In a time of grief, the last thing you want to do is leave your loved one with the financial burden, so take the time to make sure your life insurance will protect the ones most dear to you.
