Life insurance is one of the most critical pieces of financial insurance you can buy.
No amount of money will bring you back from an untimely death, but if your family is reliant on your income then going without it puts them at grave risk if you suddenly pass away.
The best option for most people is to buy a term life insurance policy for a minimum of 5 years worth of your annual income; 10 years or more is preferred.
But sometimes those polices can seem out of reach or simply inconvenient to get.
I’m not saying inconvenience is a legitimate excuse (you can buy a policy online and they will send a nurse to your home to the medical exam!), but it is one nonetheless. Sometimes cost keeps us from buying the life insurance policy we really need, too.
Many people instead opt for their employer’s life insurance.
Using that life insurance is generally easier and more affordable because you are part of a group plan. The cost can be taken straight out of your check so you never feel the impact of the insurance on your budget. Your employer may even pay for your coverage, or at least part of it.
However, relying solely on your employer’s life insurance is fraught with danger.
Why Your Employer’s Life Insurance Isn’t Enough
There are three critical reasons why getting life insurance solely through your employer is a bad financial move:
1. You Must Be Employed
Any benefit you get at work is tied to your employment there. If you find yourself no longer employed there — either by choice of your own or through being laid off or fired — you lose access to those benefits.
The same is true for your life insurance with an employer.
While the coverage is nice, it leaves you 100% reliant on continuing to work at the same employer. Considering most people entering the workforce now (or have entered in the last several years) will change employers 3 to 7 times (at minimum) this puts you at risk.
You don’t want to leave your life insurance behind when you change jobs.
2. Low Coverage Amounts
Life insurance provided through your employer typically is going to be on the low end of the coverage range.
You likely won’t be able to get a $2 million policy on your life through work. Some policies cap out at very low amounts that wouldn’t provide you the adequate 5 to 10 years’ worth of earnings.
Many employers will provide you coverage equal to your base salary so you only have coverage for one year. Additional coverage is something you have to pay for out of pocket.
That means you need a separate policy to get the coverage you need. Don’t accept the minimal coverage only; take it if you must but get coverage elsewhere.
3. Policy is Not Portable
The biggest underlying problem with life insurance through your employer is it is not portable.
As mentioned above, if you change jobs several times you will be reliant on the next job to have the same type of life insurance that you can quickly pick up to cover your family.
It is far better to buy a term life policy on your own because it solves all of the above problems. It is portable so you won’t have to worry about getting life insurance through your employer. It has as many coverage amounts as you could possibly need. And even if you are unemployed, as long as you make your premium payment then your life insurance is still in force.
Editor: Another aspect to consider is the time you lose on good rates if you rely on your employer’s coverage.
Let me explain.
Life insurance is generally less expensive the younger you buy it. This is because the younger you are the less likely you are to have a reason to use it. If you are only using your employer’s coverage then you miss out on getting cheaper life insurance when you are younger. Should something happen years down the line and you need to get your own life insurance you’ll then face bigger payments since you’ll be older.
Is Employer’s Life Insurance Good for Anything?
All this isn’t to say that having your employer provide you a life insurance option is a terrible thing. Your family likely won’t complain if your employer provides a benefit equal to one year’s income to you upon your death as long as you have a bigger policy elsewhere.
That’s the key: having another policy that is portable, not reliant on your employment, and provides the full amount of coverage you need is the differentiator.
If you have that healthy term life insurance policy in place then your employer’s coverage is just icing on the cake. You can enjoy the lower group premiums if you like to add on some extra coverage for your family without putting your family’s financial future at risk.