Employer-paid life insurance is something that you cannot but appreciate of when you talk about your employer. But, unless you are fully aware of how life insurance through work works, you may have a mistaken idea about it. So, let’s take a look at the issue.
What Is an Employer-paid Life Insurance?
An employer-paid life insurance is a group life insurance that your employer buys to protect you. All the members of the workforce or the deserving ones enjoy joint protection by dint of such an insurance policy. The employer typically pays the premiums for the insurance.
However, with some employers the policy may be contributory, meaning both the employer and the employee contribute to the cost. Even in that case, the employer may typically provide the lion’s share.
Why Do Employers Offer Life Insurance?
Employers have two special reasons behind offering life insurance to their employees.
- As a perk, employer-sponsored life insurance creates employee-loyalty greatly. It also boosts productivity.
- In the event of something happening, the employer does not have to bear personal losses for compensation.
How Does Employer-sponsored Life Insurance Work?
An employer-paid life insurance works like a term life insurance for you.
That is, unlike a whole life insurance policy, it provides you protection for a certain period, typically up to your retirement or the job-end day. However, unlike what happens in the typical term insurance, a group insurance goes through annual renewal. At every year-end, the employer may update the policy.
On the other hand, when you own a term life insurance policy of your own, you are protected for a continuous span of time. For example, your protection lasts for 10, 20 or 30 years.
The death benefit of an employer-paid life insurance goes to your family only when you die in ‘on-the-go’ job status. If you die suspended, in a lay-off state or on a vacation, the benefit will not come up.
Is Employer Life Insurance an Alternative to Personal Insurance?
Apparently, a life insurance policy through the employer might seem like any regular term insurance policy. But, it can be worse than a term insurance that you might own.
For example, if you own a 30-year term insurance policy of your own for which the coverage is $500,000, the beneficiaries will get the benefit whenever you die within the period. (Of course, the policy has to be paid up for this.)
But life insurance through work does not work that way. You have to be like ‘on-the-spot’ for the benefit to reach your heirs. Any aberration of active role will nullify the insurance.
Should You Rely on Employer-paid Insurance?
You might want to give a shrug off to the issue of buying a life insurance policy of your own when you are insured through employer sponsored insurance. Thinking that there is already protection is not an uncommon tendency among many. But the insurance that your employer buys for you has its limitations that make it worthwhile for you to purchase your own life insurance.
Here are the 6 reasons you should not rely on your employer-paid life insurance for:
- The death benefit that a group life insurance offers is too low. The amount does not often cross $100,000 which is too scanty for the survival of a family. Though employers can buy up to $1 million, they usually do not do so.
- The owner of an employer-sponsored life insurance is the employer himself. As such, you do not have a right to make any alterations in it.
- You may not have the individual purchase right. That means after you have been terminated or have left the job, you may not be able to turn it into a policy that you own.
- Raising coverage depends on your employer, not you.
- If the policy is contributory, you pay higher cost for unhealthier and older people whose mortality risks you share. Typically, group life insurance policies are costlier than individual policies.
- Employer-paid life insurance with $50,000 plus coverage has tax on it. But a personal life insurance typically lets you enjoy tax benefit.
Pros of Employer-paid Life Insurance
Despite the drawbacks, an employer-sponsored life insurance has certain positive sides to mention.
- Oftentimes, your life insurance through employer comes to you free of cost. Getting insured without expenses is certainly a useful perk. There is every reason to take advantage of such an offer.
- Enrolling on a group life insurance comes to you as a no exam life insurance. If you have health issues that might prevent you from getting insured, employer-sponsored insurance is a good approach.
- At the end of the job, you can take steps to extend protection and turn it into a private policy that you own. However, you will require to pay higher costs for this.
What to Keep in Mind about Employer-Paid Life Insurance
For sure, the offer of life insurance through work is great. But do make sure that:
1) The insurance through job comes to you free of cost.
There is little reason to join a contributory insurance wherein you pay for other people’s mortality risks that the insurer has you pay.
2) You own a life insurance of your own alongside the employer sponsored insurance.
Insurance through work is never an alternative to a personally owned life insurance policy. The protection is ‘average-only’ that carries little weight when it comes to family protection behind your death. Besides rights to the policy, your own policy provides you best protection as you carefully calculate how much life insurance you need to buy for the best protection of your heirs.
Finally, a free-of-cost life insurance through job is alright. But, if you need life insurance, owning one of your own is the best idea. An employer-paid life insurance is never an alternative to a personal insurance protection.