Life Insurance from your Employer FAQ

Here are a couple of common questions and answers about life insurance provided by employers as part of their employee benefits and compensation.

Should I have my own policy?

The simple answer is "yes", but only if you need life insurance. After you have determined that your situation requires a life insurance policy, then you should make sure that you have your own separate policy. First of all, the amount that most employers provide is usually only 1 or 2 times your annual salary. For most people that would not be enough, as most financial experts recommend that you have seven to ten times your annual income in life insurance to replace your lost income.

Another issue is portability. If you leave the company, then in most instances you will leave the life insurance policy behind. You don't want to risk your new employer not providing life insurance benefits, and you also don't want to risk not being able to qualify for your own policy in the future (Link to a real life example).

Should I purchase additional life insurance from my employer?

Many companies give their employees the option to sign up for additional life insurance during their benefits registration period. The premiums are usually deducted automatically from your paycheck. Many companies also allow you to purchase life insurance for your spouse in the same manner.

These supplemental life insurance policies from your employer have the same issues that I mention above. Many times, the amounts are lower than you may need and portability is often an issue. Depending on the way the policy is setup with the life insurance company, you may be able to take this type of policy with you so read the fine print. You also need to make sure that if you leave your company and your policy is portable, that you continue to pay the premiums on your own. When you leave the company, the automatic payroll deductions will stop and you will be responsible for making sure that the insurance premiums are paid.

Also, with these supplemental policies, price is also an issue. I would recommend that you compare the rates to a policy on the open market as you will probably be able to find a cheaper rate. Supplemental employer life insurance does come in handy if that is the only life insurance for which you or your spouse qualify, as qualification is usually automatic up to a certain amount.

Edit: I came across a similar article today on My Money Blog that addresses the same issue and even has a few numbers and a graph to go with the analysis. All you math nerds enjoy. One thing I'll add is that even if the employer sponsored plan is cheaper than the best individual plan you can find it still may be worth the extra expense to have your own policy that is not reliant on your employment situation. Any type of life insurance protection that has the possibility for gaps in coverage is not fully removing that risk from your financial future that the life insurance is supposed to accomplish.

I've also heard of a few horror stories where employers were deducting the money, but the insurance company was not getting the money passed through. Therefore the employees thought they had life insurance, but the insurance company didn't have a policy for them. Make sure the insurance company is getting paid and has record of your policy.

Michael, Garden State Life Insurance