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.
I definitely want more coverage. I think mine is only $40,000.
Glen Craig says
I take that’s your employer coverage?
John S @ Frugal Rules says
I think it depends on your situation, but if you’re married or have a family then I’d say it’s generally not enough. Before I left my last job, I always just viewed it as extra and did not consider it part of my coverage. That way, if something did happen to me, it was just icing on the cake.
Glen Craig says
That’s a good way to look at it John.
Here in the UK, if you’re lucky enough to have an employer who provides life insurance it tends to be for 3 or 4 times your annual basic salary.
You have to consider why you need insurance in the first place.
If your single, and have no financial dependents – whats the point of life insurance ??
If your married, or married with kids, then life insurance should come with the wedding ring, and certainly with the news of your first child.
You should get cover for your outstanding mortgage – plus the income you need to raise a child to age 18.
It might sound like alot of cover, but the pain of paying a monthly insurance premium is nothing compared to the pain felt by a family left destitute by the death of a bread winner.
Love your blog
Glen Craig says
Great points! But I think even if you’re young and single with no dependents it still might be worthwhile to look into life insurance early when you are generally healthier and the coverage will be cheaper.
Kevin @ Growing Family Benefits says
Many group plans are portable but the carriers require that you convert to an individual policy within thirty days of leaving employment. When changing jobs it is very easy to forget this important detail, and the rates are often quite high because the only people remembering to convert are those who are very sick.
Which leads to another reason group policies leave have holes. People often stop working because they are disabled. If you lose group coverage for this reason, you may not qualify medically for an individual plan.
Glen Craig says
Interesting points Kevin. I you have an insurance policy from your employer and you leave then it’s worth checking to see if you can keep the coverage (and if the coverage is worth it).
The biggest on for me that you hit home on is what if you are not working? I know so many times I have been happy to have life insurance through the job and never even gave thought to what about losing my job and not having coverage. Sadly though if someone loses their job the last thing on their minds from people I talk to is life insurance. They are worried about getting a new job, paying bills etc. This could easily slip through the cracks.
Having an insurance for sure is important, necessary even. I believe employer’s life insurance offer varies from one company to the other. Some companies let you keep the coverage even after you left them, while some don’t. I think choosing your own life insurance is still best. The question though is not which one is a good insurance or which is a bad one. They will say they are good anyway. The best way to look at it when trying to decide is what do you need and which plan works best for you and your family. Being informed is key.
Penelope Love says
You are correct, being informed is key!! Although some employers do allow you to convert your policy after one leaves, the cost is not usually parallel to what one was paying as a part of the group policy. This is also why it is so important that one has a separate portable policy that transcends the test of time and employment, provided one is able to continue premiums