Insurance and life insurance in particular is something that most people don’t really like to think about. We really don’t like to think about our own mortality, however we all know that day will come some day. The mortality rate for being human is 100%.
Having good life insurance can be a critical component in loving our family well. If you have sufficient life insurance then at least financial stress will not be added to the grief that your loved ones must suffer if you should pass away much earlier than you expect.
What about work-based life insurance?
Many companies offer life insurance among the benefits they provide employees. Sometimes it is based on your annual salary or some multiple of your annual salary. Often times the rates are fairly good because as the company is buying large amounts of insurance, they can negotiate better rates.
For many years I relied solely on the life insurance I was able to purchase through my place of employment. I thought this was sufficient coverage and it only cost a few dollars a month so I thought I was getting a deal. I was very wrong.
Not enough coverage
The first big problem with work-based life insurance policies is they rarely provide enough coverage. The basic idea of life insurance is to replace you financially if something should happen to you. At minimum, if your family depends on your income, you should have enough insurance that the money could be invested and continue to provide them with the income they need to get by if you were no longer here. 10 times your current income is a good starting point for that. If you have significant debt or a large mortgage you might also want to include enough additional insurance to pay off those debts.
When I was depending on my company provided life insurance, I was paying extra to get about 5 times my income in coverage. This certainly would have helped my family get by in the short-term, but it would have been woefully inadequate for the long-term.
The company can change the plan
Another problem with company sponsored insurance is that you don’t really control it. If they decide that times are getting tight and they need to cut benefits, they could decide to significantly increase what you need to pay to maintain your life insurance or they could cut it all together.
Now obviously you would have the option at that point of going and getting insurance from a third-party, but what if in the mean time you’ve had a cancer scare. Maybe you are healthy now but the cancer in your medical history makes you uninsurable for life insurance. Even if you haven’t had a significant health issue, life insurance rates are largely based on age and health. As you get older, the rates you will pay to sign up for a new policy will continue to go up.
What if you lose your job
This one is the really big one. The most significant problem with depending on your company to provide your life insurance is what happens if you lose your job. You might get the opportunity to convert it to a personal policy or you might just suddenly find yourself in a position where you now have no income and no insurance. Depending on your health and age, you might find it significantly more expensive to replace that insurance at a time when you can hardly afford new bills. I know this from personal experience as this is exactly what happened to me a few years ago.
Something is better than nothing
Company based policies are not necessarily bad. In fact sometimes they can provide you with at least some insurance at a very cheap rate. The problem comes if that is the only insurance you have. You are potentially leaving your family at risk if something unexpected happens with your work.
For this reason, I would strongly urge you to have a good term life insurance policy that is completely independent of the company you work for. If you want to supplement that personal policy with some life insurance through your work because it is very inexpensive, that’s great too, but take care in depending solely on a policy you get through work.
The Life Insurance Movement
Jeff Rose at the Good Financial Cents blog is starting a Life Insurance Movement to encourage people to make sure their families are properly covered with insurance. Many financial blogs will be writing today on this topic. I support him 100% in this. If you have loved ones that are depending on the income that you provide, please, please, please make sure you have adequate life insurance. 10 times your annual income is a good rule of thumb to start with. For a little more comprehensive assessment, there is a nice life insurance needs calculator at http://www.lifehappens.org/life-insurance-needs-calculator/.
If you are single and don’t really have anyone that depends on you for financial support or if you have done a great job financially and have a significant amount of money saved that your loved ones could access if you passed away then you probably don’t really need life insurance. For the rest of us though having sufficient coverage is a key component of loving your family well.