Reasons why employer-provided life insurance isn’t enough

BY: ANDREW STEWART

Maybe you’ve been meaning to buy life insurance but just haven’t gotten around to it. If you recently got a new job, or if it’s open enrollment season, you might have a chance to get life insurance through your employer at little or no cost. That’s is exactly what happened with a client of mine. They have a successful business as a bookkeeper and tax consultant, with a growing family. Being that person who likes to be prepared and have set plans for the future they understood how important it was for them to have life insurance and health coverage. This year they contacted me and said: “Andrew I’m shutting down part of my bookkeeping business and will be starting a new job.” “With my new job I’ll be getting full benefits with life insurance, do I still need my life insurance policy?” and is there a way to lower the cost?” You see employer-provided benefits, though well-intentioned, can nonetheless be a minefield for misinterpretation.

Life insurance, for example. It’s a popular employer-provided perk that is lulling workers into a false sense of security. In most instances, workers merely accept the low-cost or free life insurance benefit without thinking it through. Nothing wrong with low-cost or free, but that isn’t necessarily enough. You can break down reasons for buying group life insurance through work into three main advantages: convenience, price, and acceptance. Convenience is key to those who know they need life insurance but haven’t bought it yet. Getting coverage through work can be the easiest way to protect your family. People with serious medical conditions may qualify for a much better rate through the group policy than they could get on their own. A medical exam is not required, although you might have to fill out a detailed questionnaire.

Smaller firms tend to offer a flat dollar amount, maybe $25,000 to $50,000. The norm is typically a multiple of salary; one times salary is common, though sometimes generous employers offer up a two times or three times free life insurance benefit. 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. Another shortcoming is 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.

Most people are aware of the biggest disadvantages of group life insurance; you’ll 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. Most workers who get coverage through work don’t know where their life insurance will come from if they change jobs, are laid off, their employer goes out of business or they switch from full-time to part-time status. 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 will likely become much more expensive, as you’ll be converting you’re at term policy at your current age not when you started employment. And if you’re losing your coverage because you were laid off, the premiums might be unaffordable.

A common issue that people forget or underestimate is your plan doesn’t provide enough coverage for your spouse. Couples often assume the family will only suffer economic hardship if the primary breadwinner dies. But the death of a non-working or lower-earning spouse can have just as big of an impact. “I often say rhetorically to a client, if your wife or husbands dies on Saturday are you going back to work Monday morning? Do you have ample PTO [paid time off] on the books to cover an extended leave?”

While there’s no reason not to take advantage of any free or inexpensive insurance your employer offers, it probably shouldn’t be your only source of life insurance