Financial Fitness

Employer Sponsored Life Insurance Isn’t Nearly Enough

by Erik Neilson

For many people, employer-sponsored life insurance serves as an introduction to the concept of life insurance in general. Companies small and large offer free/low-cost life insurance to employees as a benefit, which is often welcomed by those who are not particularly well-versed in the finer points of life insurance. It can offer peace of mind and seem attractive to young, healthy professionals. But is employer-sponsored life insurance really enough for those who are looking to protect their families?

Short answer? No. Let’s take a closer look at the problems associated with employer-sponsored life insurance, and why it’s often wiser to consider an individual plan. 

1. Inadequate Policies

Perhaps the most attractive element of employer-sponsored life insurance is how non-invasive the associated costs can be. If it isn’t free, it’s usually very low in cost. More importantly, any costs that are accrued typically come right out of one’s paycheck, which means bills don’t enter into the equation. As with anything else that seems too good to be true, however, these free or highly affordable life insurance policies offer very little face value coverage. 

Employer-sponsored plans often use the employee’s salary as a baseline for determining coverage. Those who make $60,000 annually, for example, can usually expect matched ($60,000) or doubled ($120,000) coverage, which can seem like quite a bit of money for young professionals. This being said, a premature passing that affects your spouse/children can be far more costly than a year’s wages. In an ideal situation, a life insurance policy should be between 5-10 times one’s annual salary to sufficiently cover family expenses. 

2. A Lack of Proper Spousal Coverage

If there’s one thing that people tend to worry about when it comes to their life insurance policies, it’s spousal coverage. In the vast majority of cases, employer-sponsored life insurance policies do provide spousal coverage, but it’s rarely enough. Take, for example, a case in which one’s spouse passes away unexpectedly and is only covered at a rate of $100,000. This may sound like a lot of money, but it doesn’t go nearly as far as one might hope in the case of unexpected passing. Add to this the trials and tribulations associated with raising a family on one’s own if children are involved, and inadequate spousal coverage becomes a real problem.

3.  Coverage Gaps May Occur

Most people can attest to the dangers of health insurance gaps. After all, you never know when you might need to be insured, regardless of how healthy you may be. The same can be said for life insurance gaps, as walking around without coverage can be very risky. Many people simply don’t know where their life insurance will come from in the case that they switch jobs, get laid off or otherwise stop working for their employer. The sad fact of the matter is that employer-sponsored life insurance typically comes along with an utter lack of portability, meaning you won’t usually be able to keep your policy if you leave your job or even switch from full-time to part-time status. Even if a policy allows you to switch from employee-sponsored to group life insurance, you’ll most likely be dealing with higher expenses as a result. 

Employer-sponsored life insurance may sound like the right solution for you and your family, but it very rarely covers all the bases. At the very least, it’s important to look into the details of what going with an individual term life insurance policy can do for you and how much it may cost out of the gate. Always remember: just because the money comes out of your paycheck non-invasively (or not at all) doesn’t mean you’re being covered as well as you need to be.