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Employer sponsored life insurance risks

Get the right life insurance

Employer-provided life insurance is a valuable benefit that many workers rely on for financial security.

While it offers a layer of protection, understanding the limitations of this coverage and the risks associated of relying solely on this plan for your insurance needs is crucial.

As we enter a new year, and with the hopes many will take this time to take stock of their financial position and make changes as necessary, I’d like to shed some light on why company-sponsored life insurance may not be adequate on it’s own.

Coverage limitations—One of the primary drawbacks of employer-provided life insurance is the often-limited coverage amount. Employers typically offer a standard amount or a multiple of the employee's salary, which might not be sufficient to meet the diverse financial needs of your surviving family including outstanding debts, mortgages, and future expenses. For example, if your company sponsored plan provides coverage the equivalent of two years’ worth of your salary and you plan to work for another 20 years before you retire, how will your family make up the difference of those other 18 years of lost income?

Lack of portability—Company-sponsored life insurance is tied to employment. If an employee leaves the job or retires, the coverage may cease or become more expensive to maintain. Losing coverage during a period of transition can leave individuals and their families vulnerable, especially if there are health issues that make securing new coverage more challenging or expensive.

Limited customization—Employer-provided life insurance plans are designed to cater to a broad employee base, often lacking the customization options available in individual policies. Tailoring coverage to specific needs, such as education expenses, outstanding debts, or estate planning, may not be possible with a group plan. Individuals with unique circumstances may find that the coverage provided is too generic to adequately address their financial concerns.

Tax implications—In some cases, the death benefit received from employer-provided life insurance may be taxable, depending on the plan's structure. This can significantly reduce the actual amount available to beneficiaries. In contrast, individual life insurance policies often provide tax-free death benefits, offering a more efficient way to transfer wealth to heirs.

Insufficient for complex financial situations—Individuals with complex financial situations, such as business owners or those with substantial assets, may find employer-provided life insurance woefully inadequate. In these cases, where estate planning, succession, or charitable giving is a consideration, a more robust and customizable life insurance strategy is essential.

Limited control and ownership—Employer-provided life insurance is generally owned and controlled by the company. This lack of ownership means that employees have limited say in the terms and conditions of the policy. Individuals seeking more control over their coverage, including the ability to name specific beneficiaries or change coverage levels, may find that an individual policy better aligns with their preferences.

Rising premiums with age—While employer-provided life insurance is often cost-effective, especially for younger employees, the premiums may increase significantly with age. If employees plan to rely on this coverage for the long term, they should be aware of potential premium hikes as they age, making individual coverage more attractive for stable, long-term protection.

While employer-provided life insurance is a valuable benefit, it should be viewed as a foundational layer rather than a comprehensive solution. Recognizing the limitations of this coverage and understanding the potential risks associated with relying solely on it is essential.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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