Why workplace life insurance is just OK.
Do you have a workplace life insurance program?
The answer is almost certainly yes. In fact, according to the Bureau of Labor Statistics, 60% of private employers offer some type of workplace life insurance program.
I’m going to make the case today on why young and healthy workers should generally opt out of these programs that have out of pocket costs and instead get their own policies.
Let’s start with the basics.
What is a workplace plan and how does it work?
If you have a workplace life insurance program chances are it is a multiple of your salary (1x, 2x, etc.). A typical benefit is 2x your salary paid by the company with the option to purchase additional out of pocket coverage. Policies are typically term products (i.e. the premium is paid, and the coverage is in force. Stop paying, it lapses).
The process to get the policy is super easy. You sign up during benefit enrollment season and provided it isn’t above a certain threshold (e.g. $500,000), you don’t even have to provide personal information.
So, workplace plans are easy and sometimes free – what’s the downside?
Three negatives: coverage, cost and portability.
Coverage – Most employer plans top out at 5-6x salary. A good rule of thumb for coverage is 10-15x yearly income. Your employer plan won’t get you all the way to where you need to be.
Cost – The cost of employer plans is not based on your individual health risk but rather on a pool of employees in your age bracket. Which means that you are considered an “average” risk. If you’re healthier than average, you are overpaying to support less healthy members in your pool.
Lack of portability – When you leave your employer you likely can’t take your plan with you. Which means that you will lose your coverage, be forced to buy an individual policy, or opt into another employer plan. This isn’t a sustainable model as some employers don’t have plans and what if you decide to start your own company?
The takeaway: If you have free coverage through work – take it. If you’re paying for additional coverage and you’re healthy, let’s talk.