It’s Open Enrollment. Do You Have Enough Life Insurance?

Let’s face it — thinking about life insurance isn’t most people’s idea of a good time. Not only can insurance be dry and complicated, but the idea of death is pretty unsettling. Still, no one wants to leave their loved ones unprepared, and life insurance is one of the worker benefits that many employers offer during the end-of-year open enrollment season. That makes now a great time to learn more about it, especially if you are wondering whether getting coverage through work is right for you.

Choosing Between Term and Whole Life Insurance

Term life insurance, which covers you for a set term — or period of time — can be relatively simple to get and typically costs a lot less than whole life insurance, which covers you for the rest of your life and has additional financial benefits beyond a lump sum death benefit (we’ll get into this below). But there’s a tradeoff: If you outlive your insurance term, you’re left with nothing to show for it.

To add another layer of complication, the term life insurance offered by many employers — known as group term life insurance — often covers workers just for the length of their employment, so if you change jobs, you may have to find new coverage.

Is Your Employer Policy Enough?

Employers that offer group term life insurance often provide a baseline benefit amount and pay all or most of the premium for you. Since there’s little or no cost, and usually no medical evaluation or paperwork required, taking this coverage is one of the few no-brainers you’ll encounter in your benefit selection. However, one of the big drawbacks to getting term life insurance through work could be a low benefit amount. More than half of employers who offer life insurance provide one year’s worth of pay or less, and just 2% offer more than two years’ worth, according to a 2023 study by Guardian Life.

Then the question becomes: Do you need to buy more coverage? In other words, how much money will your family need if you die? There is no one-size-fits-all answer, and there are many ways to calculate what they’ll need if you aren’t around.

How Much Life Insurance Do You Need?

Life insurance is meant to protect loved ones from financial disruption, so at a basic level, you want to think about replacing your income. Some experts recommend getting coverage for at least 10 times your annual salary, but there are plenty of different methods for determining an amount. For example, you could multiply your annual salary by the number of years you have left before retirement.

Or you can add up a list of expenses. Some financial planners recommend carrying enough insurance to pay off all your debts, including a mortgage if you share a home with someone, and to support your spouse and dependents for one year after your death. Other considerations may include college tuition expenses for children, the cost of health insurance, replacing your 401(k) match, childcare expenses if your surviving spouse were to return to work, and the cost of replacing your contributions to the household (home maintenance, tax preparation.)

If it seems daunting, don’t stress. A life insurance calculator (here’s ours) can be a good place to start.

What About Getting Your Own Policy?

Leaving aside the affordability of getting coverage through your job, there’s no doubt buying your own life insurance policy gives you a lot more control. You can choose the exact kind of coverage you want: term life, whole life, or universal life, which is another type of permanent coverage. Permanent coverage — much less commonly offered by employers — comes with higher premiums, but it never expires, and it offers savings and investment options — and the ability to borrow against the cash value of your policy.

Here’s another consideration: If term life insurance makes the most sense for you, and your employer offers additional coverage at an extra cost, you’ll want to weigh all of your options, including buying individual term life insurance on your own. On the one hand, the employer’s group discount may make the premiums on this additional coverage more affordable and you may be able to get a better deal if you’re older or have health problems.

On the other hand, you can’t shop around and there can be less flexibility to add a spouse to the policy or make other adjustments. And don’t forget employer-provided life insurance is linked to your job — and sometimes to full-time status. If you leave the job or cut back your hours, you could lose coverage.

Who Might Benefit From Taking Out Term Life Insurance?

For people on a tight budget, term life insurance is the most affordable choice. You can use lower-cost term policies to cover your insurance needs and invest separately in an investment account, such as an Individual Retirement Account or workplace 401(k).

Generally speaking, term life insurance can be a good choice for people who are looking for protection until retirement, when a surviving spouse would inherit their retirement assets and Social Security survivor benefits. Or, would-be parents could consider their children’s graduation timeline when buying a term policy.

(SoFi’s partner Ladder can make it easier to find affordable term life coverage and is worth checking out, if we do say so ourselves.)

Who Might Benefit From Taking Out Whole Life Insurance?

If you’re looking to reclaim some of the value of your premium payments, whole life may be a good option because policyholders can withdraw payments tax-free or take tax-free loans against the cash value. Whole life insurance may also be a good choice for someone who fears a surviving spouse might run out of money in retirement.

Whether you opt for term life for its affordability and simplicity, or whole life for its lifelong coverage and financial benefits, the key is to ensure your coverage matches your family’s future financial needs. Remember, life insurance isn’t about you — it’s about providing for those you love when you’re no longer able to do so. Take the time this season to make informed decisions that will offer peace of mind and financial security for years to come.

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