Should you rely on group life insurance through work?

We recently did a live Q&A with Lifehacker where we were asked a couple of times, in varying forms, a question we get all the time about life insurance: how important is it to have life insurance outside of work?

One of the biggest misconceptions about life insurance is that if you have coverage through work, you’re set.

Free, or almost free, life insurance through your employer is a great work perk. However, if you have a spouse and children who rely on your income, employer-provided life insurance can leave you substantially underinsured and without coverage once you change employers.

If you’re newly employed, or it’s open enrollment season at work, it can be tempting to try and check life insurance off your to-do list by purchasing it through your company.

Before making that decision, it’s important to understand the benefits and drawbacks of this type of life insurance offering.

What is employer-provided life insurance?

Employer-provided life insurance is exactly as it sounds – it’s group life insurance coverage that is offered by or paid for by your employer. With this type of policy, you generally are guaranteed coverage and enrollment may be automatic. No medical exam is needed. And premium amounts are typically not dependent on your age or health, as everyone in the company has the same rate.

Coverage amounts are usually one to two times your annual salary, with options to purchase more if you’d like. If you choose to buy more, it will be considered “supplementary” to the free coverage they offer and may require a medical exam.

Where does life insurance through work come up short?

Employer-provided life insurance is an excellent addition to existing, individual life insurance coverage because it’s often free through your employer.

However, when you start down the path of purchasing supplemental coverage through your employer, it’s important to know that if you’re healthy, you could be significantly overpaying for coverage. Additionally, your coverage may be terminated when you leave your job or will acquire an added fee to take it with you.

How much life insurance coverage do you need?

Before you can decide if employer-provided coverage is adequate, you must understand how much life insurance you really need.

When you have financial dependents – like a spouse, children or even debt co-signers – most experts recommend having coverage that’s at least 5 to 10 times your annual income. Remember, free or nearly free employer coverage is usually only offered at one-to-two times your annual salary. If the standard work coverage is all you have, and you have a family who relies on your income, then you’re probably underinsured.

A good way to find out how much coverage you need is by using an online life insurance calculator. Then, see how that coverage recommendation stacks up to how much you currently have or that is available to you at work.

The cost of group life insurance coverage

Here’s the tricky part about group coverage. Sometimes, it’s a great value. And sometimes, you’re significantly overpaying for coverage.

Because you’re paying a “group” rate, if you’re young and healthy, you’re most likely paying more to make up for the risk insurers are taking on by guaranteeing coverage to older, less healthy individuals at your employer. If you’re older or have a pre-existing medical condition, employer-provided insurance may save you money because it’s guaranteed issue coverage that doesn’t require health information for a policy.

The best way to figure out which offering is a better value for you is by getting life insurance quotes from other insurers to see a ballpark of what you’d be paying for coverage. For example, a healthy 35-year-old man could buy a 20-year, $500,000 medically underwritten Haven Term term policy for about $21 per month.

For many people, an individual coverage outside your employer will offer more competitive rates for a policy that stays with you. That’s a win-win.

(Lack of) portability with employer-provided coverage

Your life insurance policy should go where you go. But, employer-provided policies are usually job dependent, which means that if you leave your job, coverage will end.

If you purchase supplemental insurance through your employer, you might be able to take it with you, but it comes at an added cost. When you choose the conversion option to make your policy portable, there are rate increases associated with it because the insurer may assume that you can’t get coverage independently. Therefore, you would pay a higher rate to make up for the insurer’s added risk. Additionally, your insurer will no longer be subsidizing part of the premium.

Employer-provided life insurance’s lack of flexibility (or increased cost for flexibility) can make it a no-go for many if they truly understand the coverage they’re buying. If considering employer-provided coverage, make sure you understand the terms of what happens when you leave your job.

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When does group term life insurance make sense?

Scoring a life insurance policy from your employer probably sounds ideal, and it is. With group life insurance, much of the heavy lifting and research is done for you. If your employer offers a basic policy for free, you usually only need to fill out beneficiary information, and you’re covered.

When you choose to purchase supplemental life insurance at work, you may have an easier time qualifying than you would if you applied on your own because of the cushion provided by group rates.

Price

While basic group life insurance is usually an employee benefit, supplemental life insurance offered through your employer can result in additional premiums. Because of the group nature of this coverage, however, it is often an affordable option for older people who are less healthy.

One of the most important factors to consider when accepting basic group life insurance or applying for a supplemental policy through your employer is whether you’re insurable. Since group policies are negotiated on behalf of an entire group, individuals with medical issues or risk factors may enjoy more affordable premiums than they would find on the open market.

Again, make sure you do your research on how much individual life insurance coverage might cost you to ensure the most value for your hard-earned dollars.

Convenience

It’s hard to beat the convenience of group life insurance offered through your employer. Your workplace has already done the research for you and, in many cases, participation is free. During open enrollment, your employer may ask you to fill out some basic paperwork and define your beneficiaries. Other than that, you can rest easy knowing you have at least some coverage. And something is better than nothing.

Extra coverage

If you already have your life insurance policy, you have nothing to lose by having additional group life coverage from your employer. When it comes to life insurance, extra coverage is a good problem to have. If you should happen to pass away unexpectedly, your family will be grateful for all policies you have in place.

Why you should purchase a personal life insurance policy instead of a group policy

While group life insurance can be a good deal, solely relying on this coverage is often not in your best interest. It may be convenient and inexpensive to stick with the coverage you get through work, but there are notable downsides that come with this strategy.

If you’re struggling to decide whether to bet the farm on your employer-provided life insurance, the smartest step to take is determining whether it covers your needs. If you have a group plan or a supplemental plan that only provides a year or two of income replacement, buying more coverage is usually the way to go.

After all, your life insurance coverage is their safety net. You want to ensure your family has adequate protection from the unexpected.

If your employer offers life insurance coverage as a free workplace perk, you should count yourself lucky. Make sure to fill out the appropriate paperwork to get your work-sponsored policy in force as quickly as you can.

But remember: there are numerous reasons you should never rely on workplace life insurance as your sole form of coverage. Life happens, and people switch jobs, get laid off, or retire early all the time. With life insurance outside of work, you’ll be in the best position to weather these changes without jeopardizing one of the most important assurances of all: your family’s financial future.

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