This is the 'biggest mistake I see' people make when buying life insurance, says financial planner

"If you leave an employer, the insurance goes away."


More than half, 57%, of U.S. workers get life insurance through their employers, according to a 2021 report from the Life Insurance Marketing and Research Association.

Often, that work perk is free or low cost. For many Americans, though, employer-provided coverage is not enough, says physician-turned-financial-advisor Carolyn McClanahan, a certified financial planner and the founder of Life Planning Partners in Jacksonville, Florida.

"The biggest mistake I see is that people rely on the group insurance coverage offered through their employer," she says. "This goes away once you are no longer employed and your new employer may not offer coverage."

Life-insurance coverage through an employer tends to be limited, contingent

When an employer provides life insurance, it falls under group life insurance, where a single contract covers a collection of people. Typically, firms offer basic coverage that is either a fixed amount of money, which is usually between $25,000 and $50,000, or that is equivalent to the deceased's salary.

The mean salary in 2020 was $56,310, according to the Bureau of Labor Statistics.

This is not enough coverage, says Mark La Spisa, a CFP and president of Vermillion Financial Advisors in South Barrington, Illinois. "The rule of thumb is 10 times, 12 times, or 15 times your salary."

Coverage that totals "$25,000 to $50,000 doesn't do much for anyone," he adds. "It's not going to put your kids through college or provide annual income for your spouse until retirement."

It's also worth noting, as McClanahan says, that "if you leave an employer, the insurance goes away." So if employer-provided life insurance is your only coverage, you're left unprotected during any gaps between jobs, or if you decide to go freelance.

'It is better to buy your own insurance'

Instead, McClanahan suggests, buy term life insurance outside of your employer-provided plan. This is different from permanent life insurance which can last for a policyholder's entire life and typically offers a cash value component.

There are several kinds of permanent life insurance, including whole life and universal life, and they are typically significantly more expensive than term.

People often don't buy enough coverage or don't buy coverage on a non-working spouse.
Carolyn McClanahan

Term life insurance policies typically last 10, 20, or 30 years. The amount of years you want the policy to last depends on your particular needs. For example, a parent might want a policy that would help replace their income and cover the costs of raising their children.

This is "by far" the kind of policy most people should get, McClanahan says.

"It is cheap to buy a term policy if you are healthy, and especially if you are young," she says. "So it is better to buy your own insurance rather than getting it through your employer."

More from Grow: