Many employers offer a small life insurance policy as part of their benefits package. Employees are often able to increase the initial coverage provided at an additional cost and with minimal underwriting. The low cost of this additional insurance seems like a great deal, but should you purchase it, or would you be better off purchasing it privately?
What you will learn:
- What is Group Life?
- The pro’s of life insurance at work
- Potential issues with life insurance at work
- So how much life insurance should you have?
Group Life vs. Term Life vs. Permanent Life
According to theSociety for Human Resources Management, in 2019 about 82% of employers offered group life insurance, and about 76% offered supplemental life insurance for employees. Supplemental Group Life insurance allows employees to purchase additional life insurance coverage with limited or no additional underwriting, at predetermined rates, that are based on age. These policies are owned by the employer and are typically set on one-year renewal terms. These are usually one-year term life policies.
Term Life insurance is owned by an individual. There is an application and underwriting process that is more extensive than group life insurance. These policies usually have a set term anywhere between 10 to 30 years, where the premium will be fixed. This means you will have the same payment every month (or year) until the term ends. Once the term ends, the rate will increase based on your age and underwriting classification.
Permanent Life insurance is designed to last until you die. In these policies, your premium payments are split into two buckets. One bucket purchases life insurance at a predetermined rate based on your age. The second bucket builds a cash value in the policy. In these policies, the cost of insurance is usually low to start, so more money will go into the cash value. As you age, the cost of insurance will increase. Eventually, the cost of insurance will be more than the monthly premium you pay, and money will be taken from the cash value of the policy to fund the difference. If at any point you do not have enough to pay the cost of insurance, either from new premium payments and/or from the cash value, the policy will lapse. There are many different types of permanent life insurance policies that all offer different payment structures and different returns on the cash value in the policy.
The PROS Of Life Insurance at Work:
- Cost: One of the biggest benefits of group life insurance is the low cost. With group life, every year during your benefits renewal, you are agreeing to purchase life insurance at a rate that is determined by your age. This means that younger workers will often see very low rates which allow them to protect their families for much less than they would be able to purchase privately.
- Ease of Approval: Another pro is how easy it may be to qualify for these policies. The underwriting and approval process for additional coverage in group life policies is often less rigorous than obtaining a private policy. This may make a large difference for people who would otherwise find it more difficult to get approved for a private policy due to health issues.
- Convenience: These policies often come at no cost to the employee with basic benefits packages, and who doesn’t like free? There is often no additional paperwork needed for basic group coverage, and adding supplemental life insurance is usually easy as well. Many employers have HR teams ready to answer any questions and help employees quickly add or increase coverage.
Potential Issues with Group Life:
- Long-term cost: Group life insurance premiums increase with age. This means you may end up paying substantially more for coverage down the road. With a term policy, you can lock in the cost of insurance for a set period of time. On these policies, they estimate the cost of insurance for the entire term and divide the premium by the number of expected payments. This will lead to a term policy that is more expensive than a group policy while you are younger, and less expensive than a group policy when you’re older
- Golden Handcuffs: Having coverage through your employer may limit your options should a major health issue arise. Major health issues can often disqualify people from privately owned life insurance. This may limit one’s ability to purchase supplemental insurance with a new employer. This could also mean that if you are diagnosed with a terminal illness, you may have no choice but to stay employed in order for your coverage to remain in force.
- Low Coverage: It is important to determine your need for life insurance before purchasing. (Check out our blog on insurance basics to help determine yours.) Many times the coverage limits for supplemental life insurance will be limited to a multiple of the employee’s base salary. Many will find that the base coverage that is offered is much less than their current need. This is most apparent for employees that have a large amount of their pay in the form of commissions or bonuses that are not counted as salary and not included in their life insurance coverage.
Who should buy Group Life:
- People who are harder to insure: Having pre-existing conditions can keep people from being able to purchase insurance in the private market. In these cases, accepting as much as your employer will allow may be a great, low-cost way to protect your family’s financial future.
- People with no dependents: If you don’t have anyone that depends on your income, and you don’t believe there will be in the future, group life may be a great fit. In this situation, there will be little to no consequence if your coverage were to end prematurely.
- Supplementing a need: If you have a privately owned policy in place and you see a need to increase coverage for a short period of time, this may be a great option.