The risks of relying solely on company provided life insurance

Life insurance is a fundamental part of financial planning, offering peace of mind that your loved ones will be protected financially if something happens to you.

Many Canadians rely solely on the life insurance provided by their employers, believing it to be sufficient. However, company life insurance most often falls short of what’s truly needed to secure your family’s future.

Here’s why it’s crucial to have your own separate life insurance policy:

1. Limited coverage amounts—One of the biggest drawbacks of company-provided life insurance is the limited coverage it offers. Typically, employer-sponsored plans provide coverage equal to one or two times your annual salary. While this might seem like a substantial amount, it’s often far from enough. Consider the financial responsibilities you leave behind—mortgage payments, outstanding debts, everyday living expenses, education costs for your children and the long-term financial security of your family. A payout of one or two years’ salary is unlikely to cover these needs adequately and certainly won’t replace the income you would otherwise earn for the next 10 to 20 years of your career.

2. Lack of portability—Company life insurance is tied to your employment. If you leave your job, whether voluntarily or due to layoffs, retirements, or other circumstances, your life insurance coverage usually ends. In Canada, the job market can be unpredictable, and relying solely on employer-provided coverage puts your family at risk if you find yourself without a job. Having your own life insurance policy ensures continuous coverage, regardless of your employment status.

3. Limited customization—Employer-sponsored life insurance is typically a one-size-fits-all product. It doesn’t take into account your individual circumstances, such as the size of your family, your debts, or your long-term financial goals. Personal life insurance policies, on the other hand, can be tailored to meet your specific needs. You can choose the coverage amount, the type of policy (term or permanent), and additional riders to enhance your coverage, such as critical illness or disability insurance.

4. Insufficient protection for long-term needs—Employer-provided life insurance is often term insurance that only lasts as long as you’re employed with the company. This can leave a significant gap in coverage, especially as you age. If you lose your job later in life, finding new affordable life insurance can be challenging due to age and potential health issues. Personal life insurance policies, especially those taken out when you’re younger and healthier, can provide more cost-effective and long-term protection for your family.

5. Potential tax implications—In Canada, the death benefit from a personal life insurance policy is generally paid out tax-free to your beneficiaries. While not always, employer-sponsored life insurance benefits can sometimes be subject to taxes, especially if the premiums are paid by the employer and considered a taxable benefit. This can reduce the amount your family receives, further diminishing the already limited coverage.

6. The risk of underinsurance—Relying solely on employer-provided life insurance often leads to underinsurance, meaning your family won’t receive enough money to cover all their financial needs if you pass away. This can lead to significant financial stress at an already difficult time. By securing a personal life insurance policy, you can ensure that your family has the financial resources they need to maintain their lifestyle, pay off debts, and achieve long-term goals, such as your children’s education.

7. Peace of mind—One of the most compelling reasons to have your own life insurance policy is the peace of mind it provides. Knowing that your family is adequately protected, regardless of changes in your employment situation, offers a sense of security that employer-provided life insurance simply can’t match. Personal life insurance allows you to take control of your financial planning and ensures that your family’s future is protected.

While company-provided life insurance is a valuable benefit, it’s rarely enough to meet the comprehensive needs of most Canadian families and relying solely on this coverage is a risky proposition.

I know that money is tight for many Canadians these days, but adequate life insurance coverage is one area that you simply can’t afford to skimp on.

Take the time to assess your insurance needs and speak with a professional financial planner to find a policy that fits your unique situation. Protecting your family’s future is one of the most important financial decisions you can make.

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