Employer Life Insurance Is Not Enough: Here’s Why You Should Supplement It with Your Own Policy

Introduction: The Hidden Risk in Relying Only on Work Coverage

Employer-sponsored life insurance is cheap and a nice perk, but it has major limitations. Most people don’t discover the problems until it’s too late. It’s dangerous to rely solely on group life insurance because it can leave you underinsured and unprotected.

In this guide, we’ll go over the risks of employer life insurance and how to ensure true financial protection for your loved ones.

What Employer Life Insurance Actually Covers (and What It Doesn’t)

Employer life insurance is usually group term life insurance that you can get from your employer. Around 58% of employees in private industries have access to these plans, so they are quite common. You can also obtain group life insurance from various associations.

Here are the typical qualities of employer life insurance.

Yearly renewable

Yearly renewable policies allow you to renew and maintain your life insurance coverage if you are still with your employer next year. You would lose it if you lost your job or wanted to switch to a different company.

Very few companies offer voluntary permanent life insurance options that follow you around even if you switch jobs.

Lower coverage amounts

Employer life insurance usually only offers death benefits with up to 1x your annual salary, and sometimes 2x or 3x. This is a lot lower than the 10x recommendation that people usually aim for with life insurance coverage.

No medical exam

The group underwriting of life insurance from work means that employees don’t need to go through individual medical exams to secure life insurance coverage. This is a nice benefit for people who have any health conditions or lifestyle habits that impact life insurance premiums (e.g. smoking).

Low cost benefit

Employer-provided life insurance generally has a low cost, so it can be more affordable or even free. That is indeed a great feature of group life insurance from work.

Why employers offer life insurance

Like retirement plans and health insurance, life insurance is another bonus that employers can provide to attract and retain talent. Because you lose the life insurance if you leave or get fired, you would be incentivized to stay longer at your job even if it’s not what you truly want.

Key limitation: Group term life insurance is a bonus, not a comprehensive protection plan.

Why Group Life Insurance Seems Appealing, But Isn’t Enough

Group insurance does have a lot of benefits, such as:

Affordability: Employer benefits come with your employment, which means they’re either cheap or free. Appealing, especially when the costs of living are high.

Ease: Most people find it much easier to simply sign up for the life insurance offered by the company instead of comparing quotes and finding their own life insurance product.

No health checks: Usually, group life insurance just requires you to be employed. You don’t need to go through health exams.

However, group life insurance has major problems. First, it creates a false sense of security. You think you must be covered, which is why most people never calculate whether the group insurance truly meets their family’s needs.

Let’s dive deeper into the issues with only having employer life insurance.

Problem #1: You Lose Your Coverage When You Change Jobs

Coverage is usually tied to your employment at this specific company, not you. This means if you quit, get laid off, retire, or switch companies, coverage would end. Retiring and having no life insurance would force you to seek life insurance later in life, which means higher premiums and greater difficulty qualifying for coverage.

Many workers change jobs every 2 to 5 years, so losing coverage is a big inconvenience and common risk. Plus, during the gap you have no job (i.e. no coverage), your health could change, and you might no longer qualify for affordable private coverage later.

Your employer should not control your family’s financial safety net. Your employer should not control your family’s financial safety net!

Problem #2: The Coverage Amount Is Almost Always Too Low

Most families need 5x to 10x income in life insurance coverage for it to pay for more than just funeral and immediate expenses. This means that if you only have employer life insurance, it typically provides only 1x to 2x income, which would not be enough for expenses such as:

• Mortgage or rent
• Student loans or credit cards
• Childcare
• Tuition
• Long-term income replacement
• Funeral costs

For example:

John is 35 and working as his family’s sole income earner, with a $60k salary, when he abruptly passes away in an accident. Their employer life insurance policy provides a $60k payout to his spouse and child, which is valuable for covering the next year of expenses, including groceries, mortgage, and funeral expenses. However, after that his family begins struggling with finances as the spouse needs to find a job and also manage childcare at the same time. The mortgage payments become at risk. In order to afford the mortgage, the spouse ends up having to sacrifice funds towards college tuition.

Problem #3: Employer Coverage Rarely Includes Long-Term Financial Benefits

Group life insurance policies tend to be term-only and basic. This means:

• No cash value
• No investment or retirement benefits
• No riders for critical illness, long-term care, or disability

You’re limited to what your employer chooses, which will likely just be the cheapest policy for everyone. It is often not what people actually need.

Problem #4: Premiums May Increase (or Coverage May Change) Anytime

Employers can change providers, reduce benefits, raise group costs, or limit coverage due to company-wide health statistics. These can catch you off guard, hurting your life insurance protection. As an employee, you have zero control over the life insurance policy’s future even if you do stay with the company for years.

Problem #5: If You Want Coverage Later, You May Not Qualify

People often wait until they leave their job to buy life insurance coverage. However, age and health are huge contributing factors to the costs of life insurance. It is possible you will fail to qualify for life insurance due to age, blood pressure, health conditions, and medical diagnoses. Even if you qualify, getting sick later

But by then, health changes (blood pressure, weight gain, medical conditions) can:

• Raise premiums dramatically
• Limit coverage
• Result in denial

A major advantage to buying early life insurance is that you can lock in low rates and obtain coverage that you, and not your company, control.

Benefit #1: Personal Coverage Stays With You—Forever

If you get your life insurance policy, it will not be tied to employment. That means that you and your loved ones would continue to be protected through career changes, layoffs, and retirement, as long as you maintain active coverage. Even if you opt for term life insurance over a permanent policy, you are still fully aware of how long the coverage goes for.

Uninterrupted life insurance means a lot when no one can guarantee there is a tomorrow.

Benefit #2: You Control Your Coverage Amount

Life insurance policies vary greatly in coverage amount, which affects premiums. Coverage can range from $10,000 all the way to multi-millions. Choosing your own life insurance policy means you can pick what YOU need in a life insurance policy. Factors that affect how much life insurance someone needs include:

• Mortgage protection
• Income replacement amount
• Children’s future needs
• Debt and financial obligations
• Legacy goals

By obtaining your own life insurance policy, you can also customize it with riders and add-ons. Your employer plan probably doesn’t offer useful riders or add-ons.

Benefit #3: Premiums Are Lower When You’re Young and Healthy

Locking in rates in your 20s, 30s, or early 40s can save you thousands of dollars over your lifetime while providing active protection to your loved ones.

If you lock in a permanent life insurance premium, the rates won’t increase as you age. That means if you pay $10/month in your 20s, you would still pay that amount when you’re 60. That is so much value when you consider 60 year olds often have to pay hundreds a month, or even a thousand dollars, for late life insurance.

Employer coverage doesn’t offer the advantage of locking in an incredibly low premium for the rest of your life.

Benefit #4: Permanent Policies Build Cash Value

Whole life, indexed universal life (IUL), or variable universal life (VUL) are special permanent life insurance policies that offer substantial value. Their main benefit is that they come with tax-advantaged cash growth. It can be used for:

• Retirement income
• Emergencies
• College funding
• Buying a home

In comparison, employer life insurance policies offer none of these long-term benefits.

Benefit #5: Better Protection for Families, Dependents & Co-Signers

Having your own policy ensures a real financial safety net for your beneficiaries so that they won’t be left struggling financially after losing you. Life insurance policies can provide value to not just your children and spouse, but also:

• Aging parents or relatives
• Co-signers on loans
• Shared debt holders
• Your business
• A charity you support

Calculating Your Ideal Coverage Amount

The general rule of thumb is to obtain at least 5 to 10 times your annual income. However, you should also factor in potential risks and goals that would raise how much financial support your loved ones need, such as:

• Mortgage or rent
• Existing debt
• Childcare
• Education

Long-term income replacement is a consideration if your beneficiaries have any special conditions that prevent them from working regularly, so more coverage might be needed.

You can use an online life insurance coverage calculator for accuracy.

Term vs. Permanent: Which Supplement Works Best?

Term life insurance: More affordable and straightforward. Provides good income replacement.

Permanent life insurance: Best for building wealth over time and legacy planning. Has tax-advantaged cash growth that comes with flexible benefits.

Many people also get different policies of different durations and types. For example, you may want to carry a larger permanent life insurance policy for your spouse and infant. Then buy a 20-year term life insurance policy that is just enough to cover your child’s college tuition in case you unexpectedly pass away. Once your child goes to college with your savings, you wouldn’t need the term life insurance. The overlap is fine because one is for income replacement for a specific purpose (college tuition), the other is for general life-long financial support.

Common Mistakes to Avoid

Whether you’re sticking to employer life insurance or preparing to switch to your own policy, here are key mistakes to avoid:

Mistake #1: Thinking employer coverage is “enough” Mistake #2: Not updating policy details when life changes (e.g. divorce) Mistake #3: Waiting too long to apply for personal coverage Mistake #4: Underestimating future obligations Mistake #5: Ignoring beneficiaries or relying on outdated records

Conclusion: Your Employer Plan Is a Perk, Not Absolute Protection

Your employer-provided life insurance is a neat benefit, but only a temporary financial safety net. And it’s not very robust protection either, because the coverage is limited.

It is often better to get your own policy to protect your loved ones, secure your future, and ensure lifelong coverage.