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Is Employer-Provided Life Insurance Good Enough?

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Thursday, March 12, 2015

Is Employer-Provided Life Insurance Good Enough?

If your job comes with benefits, you probably have life insurance. That's a huge plus, considering how exhausted you are just trying to raise a family. The last thing you want to do is look for a policy in your free time.

But we think you should. Because even when you get life insurance through work, it's probably not enough. If something actually happened to you, and your family was left with the meager payout from your work-based policy, they might not have enough to stay afloat. And that's a burden you never want them to bear.

Here's why your employer-sponsored coverage falls short of protecting your family.

1) You Can't Get Much Coverage

Say you make $50,000 a year. If you have a spouse and two kids, you're already pinching pennies with that income. But here's the bigger problem: many companies cap their policy value at $50,000 or $100,000. That's the equivalent of only one to two years of your salary replacement.

If you died suddenly, would 50k to 100K be a big enough payout? Not when you consider the cost of raising a family, and having one less parent to do it.

If you've got loved ones depending on you, get a policy that's worth five to seven times your yearly salary. If you've got a spouse who doesn't work, plus a big mortgage, a couple kids, or a dependent with special needs, you might want a policy that's worth as much 10 to 12 times your salary. That's up to 12 times more than what your employer might offer.

So, here's the first problem with life insurance policies offered through work: When you accept their basic policy, you're getting just the bare bones of coverage.

2) You Can Buy More At Work, But You'll Pay More

If you want to beef up your employer-sponsored policy, you can get what's called supplemental life insurance. You pay out-of-pocket, and depending on your employer, you can up your policy amount to six times its original value.

Before you opt for supplemental insurance through your employer, think about what you'd be paying for. Employer-provided life insurance is considered group coverage. And in group coverage, everyone can get life insurance, even if they're sick or older. To make up for the risk of covering unhealthy or older employees, your employer's insurance carrier will charge everyone higher rates--including you.

If you're older or sick, the higher cost is worth it. Without employer-sponsored coverage, you'd be paying much more--or not even qualify--for life insurance on your own. But if you're relatively healthy and below 50, the rates for supplemental coverage might cost you a pretty penny.

3) Lose Your Job, And You'll Lose Your Policy

If you lose your job, you might still get a severance package. You can probably even keep your health insurance (at a very expensive rate) under a COBRA plan. But you won't get to keep your life insurance policy. The minute you leave your job, your employer-sponsored life insurance policy gets cut, too. So if you don't have a new job lined up, or if your employer decides to drop life insurance altogether, you're at huge risk.

What's worse, life insurance policies only go up as you age. So if you lose your job in your 40s or 50s, you're looking at high premiums for individual plans with only the most basic coverage.

4) You Have Very Limited Options

At the end of the day, your employer's got to look at their bottom line. Even if they offer benefits like life insurance, they're still looking to save where they can. That might mean they strike a deal with a life insurance carrier that meets their budget, not your coverage needs.

So when you buy life insurance through your employer, you don't have much of a say. You have to go with the carrier they choose, even if you could find a cheaper, better carrier on your own.

Get Better Coverage With An Individual Policy

Employer-sponsored coverage is a nice little bonus, but it shouldn't be your only source of life insurance. If you've got health problems and don't want to risk being denied coverage, you might want to stick with your plan at work (and think about tacking on a supplement policy, too).

If you're relatively healthy, you're probably better off buying individual coverage, and adding that to what you get from work. To look for the best policies, shop around online. You can find competitive prices from top-rated insurance companies. And you won't have to tie to your family’s safety net (i.e. your life insurance policy) to your job security.