For most Canadians, having life insurance means making sure that those closest to us will be taken care of in the event that we pass away unexpectedly.
That’s why when planning for the unexpected— especially when it comes to life insurance coverage, it's best not to leave anything to chance.
Upon signing a contract for a new job, while you may take the time to review your coverage for dental and vision, you may not think to review the coverage your employer offers for life insurance.
When enrolling into a company benefit plan, it’s likely that your employer’s benefit plan includes life insurance coverage.
We often skip the details of this coverage because it’s one of those far away situations that’s not frequently experienced like visits to the dentist or massage therapist. Reviewing your company-provided life insurance policy is crucial to determine if it’s sufficient to meet your financial needs.
Remember, it’s not something you have for yourself — you have it for the benefit of others.
At a high level, life insurance is a pretty straightforward product. You pay premiums to your insurance provider (or in this case your employer pays) and in the event of your death, your insurer pays out a death benefit.
It’s common for company-provided life insurance plans to pay 1-2 times your annual salary as your death benefit.
However, is this really enough?
If you have children, a spouse and/or a home for example, is 1 or 2 years of your annual salary going to support them? To add, if your total compensation heavily depends on commission and/or bonuses, calculating coverage strictly based on salary can leave your loved ones short changed.
Companies with outdated employee benefit plans are victims to life insurance plans with a fixed payout (ex: $30,000) that doesn’t correlate with changes in employee salary. This was a popular setup back in the 90s due to its simplicity and affordability. However many companies have failed to update this product, leaving their employees significantly exposed.
Personalization is by and large a big drawback with company-provided life insurance plans as they typically offer a blanket, one-size-fits-all coverage type to its employees. So if you are a 20 year old recent grad or a 40 year old with a young family, your life insurance coverage needs are going to vary significantly.
Employee sponsored plans often don’t cover the death of your spouse (also referred to as a beneficiary). Even if you are considered the breadwinner of the family - what would the financial implications be if your spouse died today? Will the loss of their income make covering day to day bills difficult? How about paying for their debt or end-of-life arrangements? Would you now need to put your child in daycare?
Like with health insurance, it’s not recommended to have gaps with your life insurance because it leaves you vulnerable. If you change jobs, get laid off, or are reduced to part-time status, you could lose your employer-provided life insurance.
Lack of portability can be a problem if you aren’t going directly to another job with similar coverage and aren’t healthy enough to qualify for an individual policy. Some policies do allow you to convert your group policy to an individual one, but it will likely become much more expensive. And if you’re losing your coverage because you were laid off, the premiums might be unaffordable.
So how much coverage do you need?
You can take a rule of thumb approach and do 6x, 8x or 10x your annual salary. If you'd like to come up with a more precise estimate, first consider how much annual income your dependents rely on from you and how many years they are likely to need it. If, for example, you have very young children, you will need to replace more years of income than if your kids are teenagers or older. Also, if you are leaving your spouse with a mortgage to bear, can they support payments on their own? Or would they need your policy to pay it off in full?
What’s the solution?
Since company-paid life insurance is rarely enough, buying additional coverage from your employer makes sense — provided it’s available and reasonably priced. Alternatively you can supplement your existing employer policy with your own individual policy. Look into either option and make sure you map your financial needs, pinpoint the potential shortcomings of your company-provided policy and how you can bridge the gap.
Beneplan is an employee benefits provider that negotiates low rates and refunds unused premiums back to Canadian small businesses. If your employer can benefit from adding more coverage for less, share this link to them.