Here are some reasons you may want to look at supplementing it with a policy that YOU own.
As part of your employee benefits package, your employer may provide some group term life insurance. Although its nice to have, it’s important to consider whether it’s sufficient to meet your financial needs.
Problem 1: 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 face value still may not be high enough. If you have dependents who rely on your income, then you probably need coverage worth at least six times your annual salary. Some experts even recommend getting coverage worth 10 to 12 times your salary.
Most people are able to buy an additional four to six times their salary in supplementary coverage over and above what’s provided by their employer. 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.
What’s more, simply multiplying your salary may not be enough to replace your actual income. Death benefits that replace salary do not take into account bonuses, commissions, second incomes, and the value of additional benefits such as medical insurance and retirement contributions
On the other hand, your employer’s group life insurance might be sufficient if you’re single or if you have a spouse who isn’t dependent on your income to cover household expenses and the two of you don’t have children. If you’re in that situation, then you may not need life insurance at all unless you want to cover your funeral expenses or have debts, such as co-signed student loans, that you don’t want to leave behind for someone else.
Problem 2: You Can Lose Your Coverage If Your Job Situation Changes
As with health insurance, you don’t want gaps in your life insurance coverage because you never know when you might need it. If you change jobs, are laid off, or are reduced to part-time status, then you could lose your employer-provided life insurance.
Lack of portability can be a problem if you aren’t going directly to another job with similar coverage and aren’t healthy enough to qualify for an individual policy. Some policies do allow you to convert your group policy to an individual one, but it likely will become much more expensive. And if you’re losing your coverage because you were laid off, then the premiums might be unaffordable.
Since the products that are available for conversion from an employer-provided plan are typically limited to just one insurance carrier’s offerings, a client can generally find a more cost-efficient insurance policy outside of the employer’s plan
Even if you don’t leave your job, there’s also the risk that your employer could stop offering life insurance as a benefit to save the company money, leaving you without coverage.
Problem 3: Coverage Gets Tricky If Your Health Declines
Another problem arises if you’re leaving your job because of a health problem. 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. At that point, it may be too late to purchase your own policy at an affordable rate, if you can get one at all, he says.
Even if your health problems aren’t significant enough to stop you from working, they might limit your employment options if you only have life insurance through work. You could end up handcuffed to your job to keep the life insurance if you experienced a serious-enough health issue.
Problem 4: Your Plan Doesn’t Provide Enough Coverage for Your Spouse
While your employer’s benefits package probably offers health insurance for your spouse, it won’t always provide life insurance for them. If it does, then the coverage may be minimal—$100,000 is a common amount, and that doesn’t go far when you lose your husband or wife unexpectedly.
Couples often assume that the family will only suffer economic hardship if the primary breadwinner dies, and as a result, many workers fail to adequately insure their spouses. But the death of a nonworking or lower-earning spouse can put great demands on the family’s income. Think of it this way… if your partner dies on Saturday, are you going back to work Monday morning?
When one parent is absent, the other must take up the slack with daycare or chauffeuring. Hours are cut back. There is never time to properly grieve and, as survivors are often depressed, productivity often falls.
Problem 5: Employer-Provided Life Insurance May Not Be Your Cheapest Option
Even if you can get all the life insurance you need for both yourself and your spouse through your employers, it’s a good idea to shop around to see if your employer’s insurance really offers the best value for the money. The younger and healthier you are, the more likely you will be to find a better rate elsewhere. Also, unlike the guaranteed level-premium life insurance that you can purchase individually, which costs you the same amount every year for as long as you have the policy, the coverage provided by your employer tends to get more expensive as you age.
Employer coverage starts out being very cheap prior to age 35 and then rapidly increases in price, 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.
The Solution: Supplement Employer-Sponsored Life Insurance With a Policy of Your Own
While there’s no reason not to take advantage of any free or inexpensive life insurance offered by your employer, it probably shouldn’t be your only insurance. Nor should most people rely entirely on the additional life insurance that they can buy through work.
On the whole, the most affordable solution is to buy the most insurance you can afford at the youngest age since, as you get older, the chance of acquiring an illness goes up—and with illness comes more expensive premiums, if you can qualify for a policy at all.
How Much Supplemental Life Insurance Do I Need?
As mentioned above, there are a number of rules of thumb for how much life insurance you need in total, such as multiplying your current salary by six, eight, 10, or more. While those guidelines can be better than nothing, they also may be way off the mark, depending on your circumstances.
If you’d like to come up with a more precise, individualized estimate, then consider first how much annual income your dependents rely on from you 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 are teenagers or older.
So, for instance, if your family would need $100,000 a year for 10 years to cover their living expenses if you were to die tomorrow, then ideally, you should have at least $1 million in life insurance.
Also, consider any large expenditures beyond their everyday needs that your survivors are likely to face. For example, if you expect that your kids will be going to college one day, then figure those costs into the equation, too.
In closing, it is great to have insurance coverage through work, although it may not always be the right fit for you and your family. If you are wondering what the proper amount of insurance is for you, please feel free to reach out and we would be glad to help with a FREE Financial Needs Analysis.