Auditing your workplace coverage to find what to buy outside it

Employer life insurance is a good starting layer and a poor foundation. It is often free or cheap, but it is frequently one or two times salary, it usually ends when the job does, and its fine print is easy to misread. The audit below takes about two hours. At the end you will know what you have, what your family would need, how big the gap is, what happens to the coverage if you lose the job, and how much to buy outside work.

The salary, balances and prices in the example are invented for illustration. Your plan documents control your actual benefits.

Step 1: gather the documents

Collect the following, from your benefits portal, your HR department or your enrollment confirmation emails:

1. The summary of benefits or benefits guide for the current plan year.
2. The certificate of coverage or summary plan description for the group life plan. This is the legal document. It explains definitions, reductions and conversion. For plans covered by the federal law known as ERISA, you generally have the right to request plan documents in writing.
3. Your enrollment confirmation showing what you elected: basic life, supplemental life, accidental death and dismemberment, dependent coverage.
4. Your beneficiary designations for each coverage.
5. Any notice of rate or plan changes from the last year.

If you cannot find a document, ask HR for it in writing and note the date. If a plan was changed to a new insurer, ask for the new certificate, because old summaries can be out of date.

Step 2: build an inventory

Write down every group benefit that pays at death. Use a table like this.

Accidental death and dismemberment coverage, often called AD&D, pays only if death results from a covered accident or for a covered loss such as the loss of a limb. It does not pay for illness. Do not count it as life insurance for the purpose of sizing your need, though it adds to the total if an accident is the cause. See accidental death and dismemberment.

Also note the type of coverage you hold: a plan paid for by the employer is group life insurance, and a plan you buy through payroll is voluntary life insurance. They behave differently when you leave.

Step 3: read the fine print

Look for six things in the certificate, and write the answer beside each coverage in your inventory.

1. How is the amount defined? A multiple of salary usually refers to "basic annual earnings" as the plan defines it. Bonuses and overtime may not count.
2. Is there a cap? Plans often set a maximum, for example a dollar limit, and the cap can be lower than the multiple suggests.
3. Does the benefit reduce with age? Many plans cut the amount at certain ages, such as 65 or 70. If you will work beyond that age, the schedule matters.
4. What ends the coverage? Termination of employment, a reduction of hours below a threshold, a leave of absence, or the end of the plan itself. Find the wording for each.
5. Can you convert or port? See keeping group life insurance when you leave a job. Note the deadline, which is often about 31 days, and the cost basis.
6. Do you owe imputed income? When an employer pays for more than $50,000 of group term coverage, the cost above that amount can be taxable to you as imputed income. This does not change the death benefit, which is generally tax-free to the beneficiary, but it affects your paycheck. See group life over $50,000 and imputed income.

Step 4: size what your family would need

Use a simple method first, then refine. The income replacement method adds up what the survivors would need and subtracts what they already have. The guide How much life insurance do I need? gives a longer version; income replacement: the 10x rule and better ways covers this approach in detail.

A basic list:

• Income to replace. Annual after-tax income the family would miss, times the number of years you want to cover (often until the youngest child is independent, or longer for a spouse).
• Debts to retire. Mortgage, car loans, student loans that do not vanish at death, credit cards.
• Future costs. College, childcare.
• Final expenses. Funeral and settling the estate.
• Subtract resources. Savings and investments you would not touch otherwise, any other life insurance not tied to your job, and an estimate of the survivor benefits from Social Security, which you can ask the Social Security Administration about.

A worked example (hypothetical)

Say Dana, 36, earns $72,000 a year. She has a spouse, two children and a mortgage. Her employer provides basic life of 1 times salary, and she bought $100,000 of supplemental coverage through payroll.

• Income replacement: she wants the family to have 10 years of her pay: 10 times $72,000 = $720,000.
• Debts: mortgage of $185,000 plus other debts of $15,000 = $200,000.
• College: two children at $40,000 each = $80,000.
• Final expenses and settling the estate: $15,000.
• Total need: $720,000 + $200,000 + $80,000 + $15,000 = $1,015,000.
• Savings and investments set aside for the family: $60,000.
• Net need: $1,015,000 minus $60,000 = $955,000.

The figures are rough and leave out many things: her spouse's income, inflation, Social Security survivor benefits for children, and taxes. They are a place to start a conversation with a planner, not a final answer. The How much life insurance do I need? runs similar arithmetic.

Step 5: compute the gap two ways

The gap is the net need minus the coverage you can count on. There are two versions, and you want both.

Version A: the job stays.

• Group coverage: basic life $72,000 (1 times salary) plus supplemental $100,000 = $172,000.
• Gap: $955,000 minus $172,000 = $783,000.

Version B: the job ends.

• Group coverage you can count on: $0 (assuming no portability or conversion is elected).
• Gap: $955,000 minus $0 = $955,000.

Her group coverage is $172,000 divided by $955,000, or about 18%, of her net need, and all of it depends on her job. The is my life insurance through work enough? will compute these gaps for your own numbers.

If she buys an individual term policy of $800,000, she covers Version A with margin ($800,000 plus $172,000 = $972,000 against a need of $955,000). Under Version B her individual policy leaves $155,000 uncovered ($955,000 minus $800,000), which she could close later with a new job's coverage or a second policy. A policy of $950,000 would cover Version B almost entirely and make the group coverage extra protection. Which one she chooses depends on the price, her budget and how long she expects to need the coverage.

Step 6: test the job-loss risk

Ask what happens to each coverage in each of these events. Write the answer in the margin of your inventory.

• Laid off. Group coverage typically ends around the last day of employment, sometimes at the end of the month. Look for an extension of benefits, a conversion option and a portability option, and their deadlines. See the guide on employer life insurance claims after leaving a job for how claims are treated shortly after leaving.
• Quit for a new job. The new employer's plan may have a waiting period before coverage begins. That is a gap, even if the new plan is generous.
• Hours reduced or an unpaid leave. Eligibility can end when hours fall below a threshold, even though you are still employed.
• Disability. Many group plans have a waiver of premium or extension for disabled employees, but you must file a claim within a deadline.
• The employer changes carriers or drops the plan. Your benefit can change at renewal, and rates for supplemental coverage can rise for the whole group.
• Retirement. Coverage often reduces or ends, and conversion may be expensive.

If the answer to most of these is "coverage ends and the options are costly," outside coverage is not a luxury but the foundation. For the contrast between group and individual coverage, see supplemental life at open enrollment: take it or buy outside.

Step 7: check the dependents

Look at what spouse and child coverage pays, who the beneficiary is and whether the coverage ends if the marriage does. The usual amounts are small, so do not count them against a spouse's real financial role. dependent coverage through work: myths about spouse and child riders tests common beliefs about dependent coverage.

A second case: two jobs, two plans (hypothetical)

Say Marco and Lena each work for a different employer. Marco's employer provides 2 times his $60,000 salary, which is $120,000. Lena's employer provides a flat $50,000. Say each spouse's net need, computed the same way as Dana's, is $700,000, because both incomes are essential. A shortcut is tempting: add the two group amounts, $170,000, and treat the household as covered, against a combined need of $1,400,000. The audit shows why that is wrong.

• Each person's coverage pays only on that person's death. Marco's $120,000 does nothing if Lena dies.
• The household needs to cover each spouse's death separately. If Lena dies, the group benefit is $50,000 against a need of $700,000.
• Both plans end with their respective jobs. A layoff at one employer removes one spouse's coverage and leaves the other's unchanged.

So the audit runs once for each person. Marco's gap is the need if he dies, less $120,000. Lena's is the need if she dies, less $50,000. The audit often finds that the person with the smaller group benefit has the bigger gap, even when their incomes are similar.

What the group plan does well

An audit should not read as a case against employer coverage. Group life has real strengths, and an honest review lists them.

• Price. The basic benefit is often paid by the employer, and supplemental coverage may be priced competitively when you are young.
• Easy entry. New employees can often obtain a set amount without health questions during the first enrollment window. For someone with a health condition, that can be the only affordable coverage.
• Convenience. Payroll deduction means the premium is hard to miss.
• A cushion. Even when it is not enough, an extra $100,000 is real money for a family that is grieving.

The problem is not that group coverage is bad. The problem is relying on it alone, because it is tied to employment and rarely sized to the need.

Questions to put to HR

When the documents leave gaps, ask HR or the plan administrator the following, and keep the answers in writing:

1. How is "annual earnings" defined for the benefit, and does it include bonuses or commissions?
2. Is there a maximum benefit, and does the benefit reduce at certain ages?
3. If I leave, by what date must I elect conversion or portability, and what will it cost per $1,000?
4. Is there a waiting period for new hires or for increases?
5. If I increase my supplemental amount at open enrollment, do I need to answer health questions?
6. Which insurer holds the contract, and when does the contract renew?
7. Where can I find the beneficiary designation form, and how do I confirm what is on file?

The answers help in two ways. They fill in the inventory, and they show how responsive the plan administrator is, which matters when your family needs to file a claim.

Step 8: decide how much to buy outside

Put the results into three decisions.

1. Amount. Use the larger of the two gaps as your upper reference and the smaller as your lower. The choice between them is a judgment about risk, price and how much you rely on the job.
2. Length. Match the term to the years of need: a 20-year term for a 36-year-old with young children runs to age 56, when the children are likely independent. A longer need, such as a spouse's retirement, may call for a longer term or a ladder of policies. See laddering term life policies to match your needs.
3. Timing. Apply while you are employed and covered. Underwriting takes weeks. If you wait until after a layoff, you may be uncovered while you apply, and a new health problem would affect the price.

Then keep the group coverage as a bonus layer. Do not cancel supplemental coverage until the individual policy is issued and paid.

Step 9: check beneficiaries and repeat the audit

Open the designation on each group coverage and compare it with your wishes. Old designations from a prior marriage or job survive until changed, and employer plans may be governed by federal rules that can override a state law. audit your beneficiaries: a worksheet for every policy and employer plan provides a worksheet for every policy and plan.

Do the audit every year at open enrollment, and after any major life event: marriage, divorce, a birth, a mortgage, a job change or a raise. Put the date in your calendar, and file the documents with your other insurance papers so that someone can find them if you cannot.

Finally, know where to turn. A fee-only financial planner can run a more complete needs analysis. Your plan's HR department can answer how the plan works. The state insurance department can help with a dispute about conversion, notice or a claim. A tax professional can address imputed income or estate questions.

Key takeaways

• Employer coverage is often a small fraction of what a family needs and usually depends entirely on the job.
• The audit has two parts: inventory what you have, and size what your family would need, then compute the gap with and without the group coverage.
• Read the certificate for the definition of earnings, caps, age reductions, termination triggers and the deadline for conversion or portability.
• Buy individual coverage while employed and healthy, and keep the workplace coverage as an extra layer rather than the base.
• Repeat the audit each open enrollment and after major life events.