Is Your Benefit Plan Life Insurance Enough?

Your company's open enrollment season is the time of year when you have to make decisions that impact your financial future as well as that of your loved ones. Once you run the gauntlet of reviewing health insurance plans, HSAs, long-term care and other benefit options, it's time to consider life insurance. Is the standard amount of life insurance coverage offered by your employer enough?

​Consider also​: Is Life Insurance a Must?

Many employers will give you a set amount of life insurance coverage for "free," by working it into your benefits package. The life insurance amount is usually a multiple of your salary. This no-effort life insurance policy is a nice thing to have, and most employers allow you to tack on additional coverage for a small monthly premium payment that comes right out of your paycheck.

The main benefits of that standard policy are that it's easy and comes at no additional cost to you. You also don't need a medical exam to qualify. If you're in the group, you're covered.

The main drawback of this type of life insurance plan is the amount of coverage you get and how long it will reasonably last your beneficiaries.

While most benefit policies will certainly cover more than the ​$8,000 or more​ for your final expenses, that lump sum will shrink when you consider the debts you may leave behind or the expenses ahead for your family. Questions to ask yourself include:

• Will credit card balances, student loans and the mortgage need to be covered by the payout?
• How long can my family survive on that payout if it needs to replace my salary?
• If I need costly long-term care before death, can my family recover financially?
• Will my kids be able to attend college without taking out large students loans?

Think over these situations and enter your figures into a life insurance coverage calculator. You'll quickly see if the amount of life insurance you need far exceeds what your employer might provide.

Another disadvantage of employer-provided life insurance policies is that if you lose or change your job, you lose your life insurance coverage. Some life insurance companies will allow you to continue or convert your policy for a cost, however.

You might be able to buy additional life insurance coverage through your employer at your own expense, or you might want to investigate other options.

• ​Your own life insurance policy:​ You can bump up your coverage by investing in a life insurance policy that stays with you no matter where you work. Keep in mind, depending on the type of policy you choose, you may have to submit to a medical exam.
• ​Retirement savings:​ If you have a well-rounded retirement plan that covers your loved ones, you may not need an additional life insurance policy at all. The idea of a policy is for financial protection for your family through a death benefit. If you've already planned accordingly, your employer's policy may be just fine.

In addition to these ideas, consider paying down credit card debt and prepaying for your final expenses. Anything you can do to keep your death benefit from dwindling due to debt is a plus.

​Consider also:​ What Is Net Cash Value in Life Insurance?

Another disadvantage of employer-provided life insurance policies is that if you lose or change your job, you lose your life insurance coverage.

Most employee-offered life insurance policies tend to be a type of term life insurance, also known as pure life insurance. This means that even if you are able to continue your policy after you leave your job, it will only pay your beneficiaries upon your death for a specified term, and once that term has passed, you'll have to renew the policy with increased payments.

If you decide to supplement your work policy, there are three different types of whole life insurance policies, also known as permanent life insurance policies. They all vary in how you pay in and how the company pays out. But the main idea of a whole life insurance policy is that it pays a death benefit to your beneficiaries whenever your death occurs rather than during a given term, and monthly premiums do not increase over time.

The money paid into a permanent insurance plan works more like a savings account, even allowing the policyowner to make withdrawals from the cash value as needed in exchange for a reduced death benefit later.

One caveat for this flexibility and dependability is that whole life insurance coverage costs more per month. If you can't keep up your monthly premium payments, the cash value of the policy will be used to cover any missed payments, potentially emptying out the cash value altogether if you can't recover.

Consider also: What Is Ordinary Life Insurance?