The Problem With Employer-Provided Life Insurance [2024]

Employer-provided life insurance can seem like a bonus for employees without their own policies. With this free or low-priced coverage, your loved ones can get thousands of dollars in the event of your passing. So, is employer-provided life insurance too good to be true?

In this article, we’ll look at the problems with employer-provided life insurance and discuss alternatives. 

What is the problem with employer-provided life insurance? 

Employer-provided life insurance is life insurance issued by an employer. Generally, employers offering life insurance will cover the policy’s cost during employment. While any life insurance coverage is better than none, employer-provided life insurance has its issues.

Common problems people face when choosing employer-provided life insurance include: 

• Low coverage amount. Employer-provided life insurance averages $20,000 or equal to the employee’s annual salary. Necessary coverage amounts vary by person, so your employer’s coverage amount may be inadequate.
• Limited availability. Life insurance offered by employers tends to be term life, limiting the availability of whole life policies.
• Limited features and benefits. The employer-provided life insurance doesn’t typically offer employees additional features and benefits, such as a spousal or children rider.
• Limited control over policy. When employers offer life insurance to their employers, they choose the life insurance, not the employees.
• Coverage restrictions. Only employees can get employer-provided life insurance, so you’ll no longer have life insurance if you leave your employer for any reason.

To some, these limits and restrictions may be a dealbreaker, but others may feel the benefits of employer-provided life insurance outweigh the drawbacks.

What are some of the benefits of employer-provided life insurance?

Employees may have mixed feelings about employer-provided life insurance. While it has some drawbacks, some benefits can make it worthwhile.

Benefits of employer-provided life insurance include: 

• Offers basic life insurance. Many people don’t have a life insurance policy, so even basic coverage with your employer is better than no coverage.
• Free/low cost. When employers offer life insurance, it’s either free or low cost, so not only will you be covered, you may not have to pay very much for your policy. Your employer could easily deduct any monthly premiums from your paycheck.
• Guaranteed coverage. Unlike individual life insurance, employer-provided life insurance often doesn’t require the insured to answer any questions regarding their medical history or complete a medical exam for approval.

If you decide to move forward with and accept your employer-provided life insurance, it’s important to consider your options if that coverage isn’t enough. 

What can I do if my employer-provided life insurance doesn’t offer enough coverage?

When you die, your beneficiaries can use your life insurance to cover funeral expenses, medical bills, and more, meaning your policy needs to cover these expenses adequately.

However, employer-provided life insurance doesn’t always offer enough coverage, so you must consider your options, including purchasing supplemental life insurance or choosing an individual life policy over employer-provided insurance.

Benefits of supplemental life insurance include:

• Offers additional coverage. Supplemental life insurance can provide an additional death benefit to your beneficiary when you pass, so they’ll have enough to cover any funeral-related expenses, medical bills, and more.
• No medical exam. Similar to your employer-provided life insurance, your supplemental life insurance won’t require a medical exam, guaranteeing you’ll receive more coverage. 

Benefits of purchasing an individual life insurance policy include:

• Freedom of choice. With an individual policy, you have the freedom to choose your life insurance company.
• Higher coverage amount. An individual life insurance policy can offer you more coverage than employer-provided insurance to ensure your loved ones won’t worry about money when you pass.

• Portability. Your individual policy follows you wherever you go, so you’ll have life insurance coverage regardless of your employer.
• Access to additional features and benefits. With an individual term or whole life policy, you can access additional features and benefits, including various riders that may offer coverage for children.

While supplemental and individual life insurance have their perks, affordability may be one of the most critical areas of concern, especially when you need a high coverage amount.

Case Studies: The Problem With Employer-Provided Life Insurance

Case Study 1: Limited Coverage and Inflexible Options

Sarah had employer-provided life insurance that seemed like a valuable benefit. However, when she examined the policy details, she realized that the coverage amount was limited and may not be sufficient to meet her family’s needs in the event of her passing.

Additionally, the policy had no flexibility for customization or additional coverage options. Sarah decided to explore alternative life insurance options to ensure adequate coverage for her loved ones.

Case Study 2: Dependence on Employment

John had been relying solely on his employer-provided life insurance for coverage. However, he became concerned when he learned that the policy would terminate once he left his current job. John realized that his dependents would be left without coverage if he changed employers or became unemployed.

To mitigate this risk, John decided to research individual life insurance policies that would provide continuous coverage regardless of his employment status.

Case Study 3: Insufficient Coverage for Unique Needs

Emily had employer-provided life insurance that offered a basic coverage amount. However, she had specific financial responsibilities, such as mortgage payments and educational expenses, that would require a higher coverage amount to adequately protect her family.

Emily recognized that her employer-provided policy did not consider these unique needs. She decided to supplement her coverage by purchasing a separate individual life insurance policy to ensure comprehensive protection for her family’s financial well-being.

Bottom Line: Should I take advantage of employer-provided life insurance? 

When deciding if you should get employer-provided life insurance, ask yourself what type and coverage amounts are available. Then, you can use this information to determine if it aligns with your needs.

However, with the limits and restrictions associated with employer-provided life insurance coverage, it might be best to purchase an individual or supplemental policy to ensure you get the coverage you need.