When you’re choosing life insurance there some important factors to consider including whether to take the insurance offered by your employer or look into a policy on your own. Like most benefits offered, if it’s free there isn’t much to think about. By all means take your free coverage but don’t cross this important task off of your to do list just yet. There are several reasons why this standard benefit just isn’t enough to get the job done.
You Must be Employed to be Covered by It.
I seems too obvious to point it out but it’s something worth reflecting on. The Bureau of Labor statistics reports that the median length of employment for wage and salaried employees is 4.2 years. Over the span of 30 years it takes to pay off a mortgage, or the next 15 to 25 years before your children are self sufficient you’ll experience an average 4 to 8 employment changes. Each of those changes require you to reevaluate what new coverage is available. In addition to that, you’ll have gaps in coverage during the transition.
More important than changing jobs is the loss of work all together. If something happens and you find yourself out of work due to layoff, company dissolvement, or any other reason, your coverage goes with it. The bad news that many people don’t consider is that once you find yourself out of work, obtaining a policy on your own becomes very difficult as one of the first questions an insurance carrier will ask about is your employment status. If you’ve waited until you’re out of work to get a policy you’ve waited too long.
Not Enough Coverage
Most life insurance policies that are offered by your employer are typically anywhere from $25K to $50K with an option to purchase more on your own. The IRC section 79 of the IRS tax code allows an employer to offer up to $50K in life insurance protection per employee without those benefits incurring a tax penalty. Any coverage purchased beyond that is considered voluntary and can be purchased in increments of $10K to $25K. The problem with this additional coverage is that it’s limited. You might be able to purchase another 4 times your salary but by no means can you take out and additional $1M to $2M in protection which you may very well need. For those that are single and have no dependents the minimum $50K may very well be plenty of coverage to shore up final expenses. Talk to your financial advisor or qualified insurance agent about how much insurance you need.
Your Policy is Not Portable Nor is It Guaranteed
Another consideration is what will happen with this policy next year and in the years to come. More than likely your group policy is not portable meaning you can’t take it with you when you leave the company. It’s also not guaranteed to be the same amount or from the same company on a year to year basis. Most people don’t even look at their policy after they’ve selected it when they begin their employment. These decisions are all left up to the HR department or the benefits administrator who handles renegotiating your benefits on an annual basis. If they choose to cut your $100K life insurance policy down to a $25K term combined with a $25K Accidental Death policy you’ll likely not even notice. In short, having your policy through the company you work for is gives you little control.
The Price is Only Good Now
The seemingly low price of insurance offered at the group rate is usually the biggest attraction people have to keeping their coverage through their employer. At first glance when you compare your employer offered policy to a level 10, 20, or 30 year term policy it seems foolish to even consider taking the higher priced term coverage. The reason for this is the term. Most group rates come in 5 year bands whereby rates are standard for all 35 to 39 year olds, then for 40 to 44 and so on. This means that what you’re paying for today is only good for 5 years or less. How much insurance will you need in 15 years and at what price will you be able to get it? The advantage of a level term policy is that you can guarantee the price will not go up at all during that term.
Take the example of a healthy 32 year old mother of 3 children who just bought a house 4 years ago. Her oldest child is 7 and her youngest is 3. If she took out an additional $200k of coverage on top of the basic $50k for a total of $250K in coverage but that price is only good for the very short run. Instead of taking this short sighted policy she could secure a level 20 year term policy for $1.2M at a surprisingly low rate. Now she has enough to cover a college fund for all three kids, the mortgage, and replace some of her salary so her husband can raise the kids as a single father. Over the next 20 years until the kids are out of the house she can stop worrying about what will happen to the price of her policy if she changes jobs or contracts a health condition much less what will happen if her family has to file a claim on that policy.
Every person’s situation is unique and worth considering on an individual basis so why would you want someone at corporate headquarters deciding what level of protection your family receives right off of the benefits assembly line?