Employer provided life insurance is one of the benefits that comes with most company's employee benefits package. It's very inexpensive, usually about $6 a month and some employers even offer it for free. Coverage amounts are typically around $25,000, $50,000 or it can equal one year of the employee's salary.
The good thing about employer provided life insurance is that it is inexpensive and sometimes even free. But, there are some things that you must know when deciding if this type of coverage is not only the proper type of life insurance but also the the right amount of coverage (sometimes called a face amount or a death benefit).
The most important thing to know is that the life insurance that you get from your employer only covers you while you work for the company. When you leave the job the life insurance doesn't follow you where you go. This could be a scary situation to be in if you are between jobs or unemployed for any length of time because you are not covered by the employer's insurance plan anymore.
If the insurance provided by your employer is AD&D life insurance (accidental death & dismemberment), then it could be even scarier because this type of life insurance only covers you in a work related accident while on the job. In other words, AD&D doesn't cover natural death and it does not cover you while you are not on the job.
One of the biggest misconceptions that people have when it comes to AD&D life insurance is they think they're covered for life insurance through work. There have been so many circumstances of people passing away outside of the job or even on the job that wasn't a work related accident and when the family calls the employer to collect the life insurance money they're told that the policy doesn't cover natural deaths or non-work related deaths.
What should I do if I have life insurance through work?
If you have free life insurance through work there is no harm in keeping it. If it's an accidental policy (AD&D), you should decide if you want to keep it or not. There's no need to pay for an accidental policy if the type of work that you do doesn't put you in any danger of having a work-related accident such as an office job. If your job requires you to scale the side of buildings and wash windows, operate heavy equipment or fly an airplane then it may be a good idea to keep the accidental policy.
How much life insurance do I need?
Employer provided life insurance usually covers one year's salary. Even though it may be enough to cover funeral related expenses, there are other things to consider. If you're the breadwinner of the family here are some questions to ask when deciding how much life insurance you need:
How will the loss of my income affect my family?
Will they be able to get by on one year of my salary?
Will my family be able to pay off the mortgage without me or do we have a lump some of money set aside to pay it off?
Will I leave debts behind for my family to pay off?
Will my spouse be able to afford sending the children to college without me or do we have a lump sum of money set aside for college?
There is a standard formula to use when deciding how much life insurance you need to properly protect your family so you leave behind an asset instead of leaving behind a burden.
The acronym for the formula is called D.I.M.E.
Debt Student Loans $__________ $__________
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Income If you or your spouse could not work again, how much income would you need