Is Your Employers Life Insurance Coverage Enough?

By Andrew Glass
Updated Mar 18, 2022
Is Your Employers Life Insurance Coverage Enough?
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If you are one of the 108 million Americans who receive life insurance coverage through your employer, you may wonder if the benefits you receive are enough to care for your loved ones in the event of your death. While employer-sponsored life insurance can be a big cost-saver, it may give some employees a false sense of security. For others, workplace-provided insurance could be an easy solution but an expensive one. 

An employee earning $75,000 per year, for instance, might receive a $75,000 life insurance policy from their employer with the payments deducted directly from the paycheck. It's fast, easy, and feels almost free. Each person's life insurance needs are different, however, and no one-size-fits-all approach can serve every employee. To find out if your employer's life insurance coverage is enough, consider the following questions.

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How much life insurance do you need?

Do you need life insurance at all? People with no dependents and enough money to pay their expenses after death probably do not need to enroll in a life insurance plan. Likewise, people who own plenty of assets and can care for their dependents long after their death may find life insurance an unnecessary expense. For everyone else - and that's most of us - it's an absolute must.

Once you've determined that life insurance is a good investment for you, start calculating the actual amount of insurance you need. You'll want to have enough to cover your funeral and burial expenses, which can easily run $8,000 to $10,000 even for a modest send-off. After that, consider the number of years you'll need to provide an annual income for your dependents. Multiply that number by your yearly salary. Add the product to the burial expenses. If you have children who will need higher education, you'll want to multiply the number of children you have times the amount you would contribute toward college or technical school. Add that number to your total. Add in any one-time expenses such as a wedding or a new car, and subtract the amount you already hold in savings and investment accounts.

Here's an example:

  • Funeral Expenses = $10,000

  • Number of years of income (10) x Annual net income ($65,000) = $650,000

  • Number of children (2) x College expenses ($50,000) = $100,000

  • One-time purchase = $15,000

Subtotal  = $775,000

  • Amount in savings and investments = $75,000

Subtotal ($775,000) - Amount in savings ($75,000)

Total amount of life insurance needed: $700,000

Using the formula above, is your employer providing you more or less coverage than you actually need? If the answer is no, consider taking out an additional policy to help cover your needs.

What happens to your life insurance after a job change?

Today's workforce is highly mobile. The born-digital generation expects flexibility and remote access for work. Younger employees are more willing to look at short-term assignments. And both employers and employees feel less sense of emotional loyalty to each other than in the past. Today, the average employee will hold 5-7 careers, and 30% of the workforce will change jobs in a given 12-month period. 

Even if you love your job and the company loves you back, you will eventually leave. When that occurs, what happens to your life insurance?

For most workers, the answer to that question is - my life insurance goes away. When a company closes its doors or moves an employee from full-time work to part-time hours, it almost always ceases to pay for life insurance. If you are leaving one company without another job lined up, you may also lose your policy unless you can convert it to an individualized one, which could prove quite a bit pricier than the discounted rate you got through your company.

If you are facing a layoff or termination, life insurance might not be your first concern. But if you are leaving a job due to declining health or retirement, life insurance can be a grave issue, indeed. 

What happens to your employer-sponsored life insurance after retirement?

After you retire, you will almost certainly not continue to receive benefits, including an employer-sponsored life insurance policy. You may no longer need life insurance after you reach retirement age, of course, but many grandparents are now serving as full-time caregivers for grandchildren. In this instance, losing life insurance can seriously compromise your family's future financial stability. 

Furthermore, a surprising number of retirees still carry a mortgage, and a whopping 700,000 retired people maintain student loans -- either their own or ones they cosigned for their children. Retirees with debt need life insurance in order to help their partners remain solvent in the event of their death. 

While employer-sponsored life insurance often goes away at retirement, employees frequently have the option to continue the policy as an individual. This option is much more expensive than a group policy, though, leaving many new retirees with sticker shock. Prior to retirement, it's a good idea to check out alternative individual policies to learn whether it will be cheaper to continue with your employer's plan or move to a new one.

Should you rely on employer-sponsored life insurance policies?

Life insurance needs are as individualized as the people who buy policies. 

For many young, healthy employees, purchasing a solid, individual term-life plan on the market can prove much less expensive than buying into a group plan. For these buyers, term life can be a good idea since the mortgage will be paid off, the kids have grown, and the investment accounts padded by the time the policy expires. 

If your health is iffy or you are an older employee, take an eagle-eyed look at what your employer's plan offers and compare it to everything else in the marketplace before you make a decision. Remember, you can always go with your employer's plan as well as a supplemental individual life insurance policy. 

If you have additional questions about life insurance, please contact us, and we can explore the options that best fit your unique situation. 

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