Employer-Sponsored Life Insurance: Is It Sufficient?
Open enrollment presents employees with the chance to select workplace benefits for the coming year, including life insurance. Most companies provide group life insurance, which covers multiple individuals under a single policy. Group life is often offered at no cost up to a certain limit and typically requires minimal effort to get approved, often without a medical exam or extensive underwriting.
According to the Life Insurance Research and Marketing Association, a quarter of Americans with life insurance only have coverage through their workplace. However, employer-sponsored policies often lack key benefits found in individually purchased policies, such as higher coverage limits, portability, and customization options.
The advantage is that you can have both an individual policy and your workplace policy. This allows you to benefit from each policy’s advantages.
Why Employer Life Insurance May Not Be Enough
- Term Policy Limitations: Many employer-sponsored life insurance plans are term life policies. These policies provide coverage for a set period, commonly 10 to 30 years.
- Inadequate Coverage: While better than nothing, employer-sponsored policies may not provide sufficient coverage to support your family’s needs. Financial experts often recommend a policy that pays out at least 10 times your annual income, while group life policies usually offer only one to two times your salary.
- Supplemental Coverage Costs: Buying additional coverage, known as supplemental insurance, may be necessary if your employer’s policy is insufficient. However, the premiums can be expensive for older workers or those in poor health, possibly costing more than an individual policy on the open market.
- Limited Customization: Group life insurance policies provide limited payout options. They may be limited in their use of certain features that can tailor coverage.
- No Cash Value or Dividends: Employer-sponsored policies are term life policies, so they don’t have a cash value component, nor can they get dividends.
- Non-Portability: Since employer-sponsored life insurance is typically linked to your job, the coverage ends with the end of your employment.
Types of Life Insurance
- Term Life: A term life policy covers a fixed period. If you die during the term, your beneficiaries get the payout. If you outlive the term, the coverage ends. Term policies are generally less expensive than permanent life insurance policies.
- Whole life: A whole life policy offers lifelong coverage and includes a cash value component, which grows over time on a tax-deferred basis. The cash value can be borrowed against or withdrawn.
Pros and Cons of Group Life Insurance
Pros:
- Often free or very inexpensive
- No medical exam or health questionnaires required
- Premiums are often deducted from your paycheck
Cons:
- Coverage amount may be insufficient.
- Supplemental insurance may cost more than an individual policy
- Coverage typically ends when you leave your job
Group Life vs. Individual Life Insurance
Here’s a comparison of group and individual life insurance policies:
Frequently Asked Questions
How does employer life insurance work? Employer-sponsored life insurance is usually offered at no extra cost, without a medical exam. It’s typically a term life policy that renews annually, ending if you leave the company. The death benefit is usually capped at one or two times your salary, but your employer may allow you to buy additional coverage, which is paid for through payroll deduction.
What happens to employer life insurance when you leave a job? Employer-provided life insurance policies usually terminate on your last day or at the end of the month you leave. In some cases, you may be able to continue paying premiums on your own or convert your group life policy into a permanent individual life insurance policy.
Does employer life insurance have cash value? Most employer life insurance is term life insurance, which doesn’t build cash value.
Is employer life insurance worth it? It’s worth getting if your employer pays for life insurance. However, the coverage limits for a group policy are not enough for most people to keep it as their only life insurance.
