Questions to Ask about Life Insurance Through Your Employer

Life insurance can help provide your loved ones with some financial security after you pass. So, having the right life insurance policy is an important financial decision. Without the right coverage, your family may struggle to replace your income or maintain their quality of life.

One of the more convenient ways to secure life insurance is through your employer. Employer-sponsored life insurance is a workplace benefit that provides basic group coverage for free or at a reduced cost. Approximately 55% of private industry non-union workers have access to life insurance through an employer.

While having access to this coverage is a great start, you may wonder whether life insurance through your employer versus personal life insurance is enough for your needs. Here are some key questions to help you find the right life insurance coverage.

What kind of life insurance does my employer offer?

About 98% of workers take advantage of employer-sponsored life insurance plans when offered coverage. These policies are typically group term life insurance. They provide basic coverage for a set period, such as 10 or 20 years, usually at a multiple of your salary, for example, 1-2x your annual income.

This coverage is also often guaranteed, meaning even if you may not qualify for other policies due to health, you'll be eligible. Employers usually cover most or all of the premium, making it an attractive perk.

While convenient, many employer-provided life insurance plans have limitations. For instance, since these are often term insurance, these policies have a set time limit, don't have cash value and you can't borrow against them the way you may be able to with permanent life insurance coverage. And if you leave the employer to work elsewhere, most often the life insurance coverage ceases.

Is the amount of coverage enough?

The median basic employer life insurance coverage is a flat sum of $20,000 or 1x annual salary, less than most people need. Over 40% of those who have workplace life insurance coverage say their families would struggle financially within six months of their passing.

So, if you have life insurance from your job, consider whether it meets your loved ones’ needs, should something happen to you. It helps to calculate expenses that would need to be covered both short- and long-term.

Review your family's living expenses and needs and ask yourself:

• Would the death benefit cover outstanding debts like mortgage, car loan or credit card balances?
• Could your family maintain their current lifestyle on that amount for several years?
• Are there future expenses to consider, like college tuition or your spouse's retirement?

If you answer no to any of these questions, you may need more coverage than just your employer's policy.

How much does it cost me?

Because employers are covering large groups, they can often secure affordable rates on the organization's basic group term life insurance. This helps keep costs low, and in many cases free, for employees, depending on coverage.

However, keep in mind that these costs may change over time. Your employer could change the option provided to employees, leaving you with less coverage than you’re used to. Also, term premiums may increase as you age. Finally, there are some tax considerations. If your employer pays for your coverage, the premiums on death benefits over $50,000 may be subject to income tax, according to the Internal Revenue Service (IRS).  

This coverage does provide a valuable benefit, giving you some life insurance at an affordable rate, even if it doesn't fully cover your needs. But it's also important to be aware of potential costs.

Can I increase my coverage through work?

You may be able to buy additional life insurance through your employer to increase your coverage during an open enrollment period or by contacting your human resources department.

Before signing up for this, consider whether it’s the most cost-effective option for your needs. For example, enrolling and paying for premiums through payroll deductions may be convenient. And you might not need to take a medical exam, which is an attractive option if you have health issues that may prevent you from qualifying for individual coverage or leave you with high premiums.

However, you may have limited coverage options and low death benefit amounts, and rates may be higher than what you could qualify for as an individual through your own policy.

What happens if I leave my job?

In most cases, employer-provided life insurance isn't portable, meaning it doesn't go with you when you change jobs. Once your employment ends, your coverage does, too. If you don't have an individual life insurance policy, you might go without coverage until you find a new job or purchase a supplemental policy.

Some employers offer options to transition your group coverage to an individual policy, but it may come at a higher cost than your previous premiums. Investigate your options before leaving your job to understand the terms and any financial implications.

What if I need more coverage?

The good news is you can have more than one life insurance policy at the same time. If you decide that life insurance through work doesn't fully meet your needs, you can also buy an additional individual life insurance policy.

When exploring individual life insurance separate from your employer, there are several types of insurance that may fit your particular needs, including:

• Term life insurance offers affordable coverage for a specific period, such as 10, 20 or 30 years.
• Whole life insurance offers lifelong coverage and includes a cash value component that grows over time, though premiums are more expensive than term life insurance.
• Universal life insurance is a flexible option allowing you to adjust coverage and premiums throughout your lifetime.

Purchasing a policy on your own means you'll have more flexibility and options. You can choose the carrier and type of coverage and increase the death benefit to the amount that's best for you and your loved ones. If you don't think your employer-provided life insurance fits your future needs, consider exploring more options.