Life insurance is critical for families such as this man and baby.

Is the life insurance provided by my employer enough?

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It’s common to see the merits of employer paid life insurance to be overestimated by the working population. In this article, we decipher the commonly misheld beliefs and provide clarity as to the differences between employer and private life insurance, how much is enough, and what to do if you need to cover the gap.

Before we get into the blog, we are financial planners in Morristown, New Jersey. We’ve written other blogs on financial planning and retirement that may be useful to you:

Our easy, clear take on the question of if Social Security increases with inflation

Retiring in Morristown NJ

End of year financial planning

What to do When Your Social Security Benefits Are Reduced

I’m invested in a 2030 target date fund –  help!

And now let’s get into it!

How does employer-paid life insurance work?

Before we answer that, let’s start with a basic question. What is life insurance?

Life insurance is a risk management tool that aims to compensate your dependents in the case that you were to pass away. In exchange for paying a periodic premium, usually monthly or annually, you receive the assurance that if you were to pass away your beneficiaries would receive a certain amount of money, called a death benefit. The insurance carrier that you purchase the insurance through determines the amount you are eligible to receive through a process called underwriting.

When you become eligible for your company benefits, you may have the option to elect to pay for life insurance provided by your employer. Or, it may even be free.

So, what’s the deal?

Here are the key differences between private life insurance and the type that your company provides to you.

  • Employer-provided life insurance may be capped at a certain level – often three times your salary amount.
  • Company life insurance is often given at a discount to what it would cost if you were to own it privately.
  • Your employer, not you, is the owner of a workplace insurance policy.
  • Unlike private life insurance, you won’t have to take a medical exam or go through the underwriting process in which your personal financial circumstances are analyzed to yield a certain amount of coverage.
  • You can’t be denied life insurance through your employer on the basis of having a disqualifying medical condition, but if you were to purchase it on your own, that certainly could happen.
  • The life insurance that you get through work won’t automatically go with you if you leave your job. Just like your key fob, these benefits expire upon termination of employment unless the company provides you with the option to extend coverage.
  • According to the IRS, the premium for the first $50,000 of coverage is not taxable in a group policy. If the coverage is higher than that, some of the premium can create “phantom income” that adds to your taxable income.

Sounds great! Why not just go with the employer paid life insurance and call it a day?

Not soooo fast there.

Because the amount is capped, it may not be enough coverage. And given that you’re not the owner of the policy, you may be at risk of becoming uninsured (and having to go through underwriting when you are older, and hence more expensive to insure).

How do you know how much life insurance you need?

There have been many approaches to answering the question of how much life insurance somebody needs. Before we get into these methods, let us preface the discussion by saying that the underwriter will determine the maximum amount of insurance you are eligible for. There is an in depth analysis that is conducted by the agent when you apply for coverage. During this process, the agent gathers information about your household, income sources, personal health history, and family health history.

Simple answer: Take your income and multiply it by 10.

More in depth answer:

Step #1

Conduct an analysis of your projected expenses that need to be paid for your household, in order to support any and all dependents of that household, from now until the end of your life. Add in your final expenses (cremation, funeral, etc.).

Step #2

Add up all the income your dependents would get from sources such as Social Security and any assets you would have left them such as your 401k, IRAs, etc. Estimate this for the portion of their lives when they would be financially dependent on your income.

Step #3

Subtract the sum of money calculated in #2 from the sum in Step #1 to find the amount that needs to be replaced. This is the amount of life insurance you need.

How do I fill in the gap between employer paid life insurance and what I need?

So now you’ve found the amount of life insurance you need. Compare that to the life insurance provided by your employer. Is there a shortfall?

If so, how do you handle it?

We believe that the solution to not having enough life insurance is to purchase an affordable term life insurance policy. There are other types of life insurance that come with investment features attached to them (whole life insurance, variable life, etc.) but they are more expensive. In our view, it is often better to use your cash flow for other needs than life insurance.

All in the context of a plan

Evaluating the merits of employer paid life insurance is great, but it is only a fraction of the planning that needs to be done in order to create the financial future you need.

We are financial advisors in Morristown, NJ serving the local community and beyond. If you have questions about your retirement, how much life insurance you need, retiring in New Jersey, moving there, affording to live there, or (like us) are just plain old Bruce Springsteen fans, reach out and send us a message.


IRS. Group-Term Life Insurance.

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