Should You Buy Life Insurance Through Your Employer? - Experian (2024)

What Is Employer-Provided Life Insurance?

As its name suggests, employer-provided life insurance is coverage you can sign up for through your workplace. This type of insurance is usually group insurance, where your employer pays the premiums for a single policy that covers a larger group of people, such as their staff.

Employers often provide a basic level of life insurance roughly equal to your annual salary or a multiple of your yearly pay, or it could be tied to your position. If your employer pays your premiums, you won't see a deduction on your paycheck. For this reason, some workers have insurance through their employer and are unaware of it.

Keep in mind, employer-provided insurance is usually term life insurance that doesn't include a cash account like permanent life insurance. Typically, if you change jobs, your group insurance coverage will end, and you won't have any savings accumulated to take with you to your new job.

And since employers often offer a base level of coverage, the amount may be insufficient for your and your family's needs. Employer-provided life insurance could be adequate for some, particularly younger people with no significant financial liabilities or dependents.

Pros of Employer-Provided Life Insurance

Life insurance can be a valuable component of your overall financial plan. Getting coverage through your employer can provide numerous advantages, such as:

• Convenience: Signing up for group insurance is a relatively straightforward process. It's generally a matter of opting into the life insurance benefit when filling out your hiring documents with human resources.
• Savings: Since most employers pay some or all of your premiums, group insurance is a low-cost option to secure life insurance.
• Guaranteed approval: Employer-provided life insurance usually doesn't require you to take an exam to qualify. In other words, you're eligible for a policy even if you have a serious medical condition. Your employer may even kick up your coverage amount if you get married, have children or experience another major life event.
• Early coverage: Getting life insurance through your employer can be a significant perk if you're beginning your career and lack the funds to purchase life insurance separately. What employer-sponsored life insurance does best is provide affordable coverage when you need basic coverage to protect your family's financial future.

Cons of Employer-Provided Life Insurance

Consider the following disadvantages of employer-provided life insurance:

• Minimal coverage: While free or low-cost life insurance is a substantial benefit, it may not provide the level of coverage you need. For example, if your coverage matches your annual salary, the death benefit may not be enough to cover your dependents' needs upon your death. Financial experts often recommend life insurance equal to 10 times your annual income or up to 20 to 30 times your income depending on your obligations.
• Limited options: Most employer-provided life insurance is term life insurance offered through a single carrier. As a result, you may not find a broad range of options compared with other insurance providers. You may need to review other insurance providers for specific term riders, whole life insurance or other options your group insurance doesn't cover.
• Not portable: Typically, you can't take your group life insurance policy with you when you leave your job. You may have the option to convert your policy to an individual life insurance policy, potentially at a higher cost. Ideally, your next employer offers group insurance; otherwise, consider taking out an individual policy from another insurance provider.
• Potentially taxable: According to the IRS, any group insurance coverage amount over $50,000 must be reported as income and subject to Social Security and Medicare taxes. If you're unsure if your life insurance is taxable, consult your tax accountant or financial advisor to determine the appropriate course of action.

What to Do if Your Employer-Provided Life Insurance Isn't Enough

As mentioned, most group insurance provides a basic level of term insurance, which could leave you underinsured depending on your needs. As such, it's wise to run some calculations to determine how much life insurance you need and if you need to look outside of your employer to purchase sufficient coverage for your family.

1. Review your after-tax assets. Add up how much money you have in savings, pensions and retirement accounts. Also include your current life insurance death benefits, estimated Social Security benefits and any other assets available to your family after you die.
2. Calculate your financial debts and obligations. Next, tally all your monthly financial obligations you cover for yourself and your family.
3. Consider your beneficiaries' future needs. Add the costs of other expenses you wish to cover if you suddenly pass away, including final burial costs, wedding and college expenses.

Subtract your debts, monthly expenses and your family's needs from your after-tax assets to help determine the amount of life insurance you should carry. If you need more coverage than your employer-provided plan provides, consider comparing life insurance policies in the marketplace to find the most beneficial one.

You might also consider purchasing a policy elsewhere if your group insurance doesn't have the options you want. For example, you may want more benefits than term insurance provides. Whereas term insurance generally covers you for a specific period and pays out only when you die, whole life insurance covers you for your entire life and includes a savings component that builds cash value over time.

Check Your Credit Before Taking out an Individual Life Insurance Policy

If you plan on adding supplements to your group term life insurance policy or getting an individual life insurance policy, be aware that insurance companies in some states check credit-based insurance scores, which could affect how much you pay for premiums. These scores differ from consumer credit scores but consider many of the same factors. Check your credit report and credit scores for free with Experian to get a clearer picture of your credit. If necessary, take steps to improve your credit, which could result in lower premiums.