Pros and Cons of Group Life Insurance Through Work
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UPDATED: Jul 9, 2019
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Does your employer offer group life insurance? According to the U.S. Bureau of Labor Statistics, civilian workers had 17 percent participation rate, union workers had 54 percent, and government workers had 89 percent. If your company offers life insurance, you may want to ask a few questions before accepting it.
This post will break down the advantages and disadvantages of life insurance through your work and the issues you need to be aware of when offered this type of coverage.
What Is Employer-Provided Life Insurance?
As the name implies, employer-provided life insurance is an insurance policy that is provided and paid by an employer to its full-time employees. This offering isn’t mandatory. It’s completely optional by the employer, but it adds an incentive over the other places of work (who don’t offer) when they hire new employees.
The face value is usually two or three times your yearly income, and with some companies, you will be able to supplement the coverage by buying extra coverage which you will be paying yourself (for which you will need to go through underwriting). There are no exams or health questions to answer as part of the underwriting process, and the approval is guaranteed.
Types of Life Insurance Benefits an Employer Offers
There are two main categories kind for life insurance: Temporary and permanent coverage. The employer will decide the type and the amount of benefit they want to offer. Below are a few choices you may encounter when your employer provides life insurance benefits:
- Term Life Insurance: Generally, this would be the first choice. Term life insurance offers protection for a particular period, usually 10–30 years. However, with this type of term insurance, it is typically for as long as the employee works there. Once you are gone, so is your insurance.
- Benefit Age Reduction: This coverage will be reduced by a set amount at a certain age, typically age 65 onward. If you worked for your company when you were 30 years old and obtained $100,000 in benefit, by age 65, you would see a 35% reduction (you’ll have $65,000), 50% reduction by age 70, and so forth.
- Group accidental death and dismemberment: Do not confuse this with a traditional life insurance policy—because it’s not. Accidental death and dismemberment (AD&D) is a policy that will pay if a death occurs due to an accident and nothing else. If you die as a result of heart attack or diabetes, your beneficiaries will receive zilch.
- Business travel accident insurance: This is an even worse option than the AD&D coverage. It will only cover the insured if they die as a result of an accident while traveling on a business-related trip.
- Split-dollar life insurance: This coverage is generally offered for key-employees rather than the whole group. If the insured dies, the employer who paid for the policy will receive the paid premiums while the beneficiaries (employee’s family) will collect the death benefit.
Takeaway: Yes, your employer may offer a free life insurance policy as part of your employment package or as a hiring incentive. Free doesn’t mean that you don’t need to understand what you’re getting. Make sure you ask your HR department to see if the current policy is what you thought it was.
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Advantages of Group Life Insurance
- There is no underwriting, health questions, or exam you need to undergo as part of the approval process. You typically have to be a full-time employee to be eligible, but if the employer offers this to you, you will be accepted for coverage.
- It’s free! Your employer may offer this coverage as part of the basic benefit package, which may include health and dental insurance. As mentioned above, free may be correct, but make sure you understand what you’re getting.
- Individuals with serious pre-existing conditions such as diabetes or history of stroke, who will pay a lot more if they buy an individual plan or may not get approved for a traditional policy, can get it through their employer.
Disadvantages of Group Life Insurance
- The coverage isn’t portable. The moment you have no job, you have no coverage. Moreover, if you will be working for yourself or with a company who does not offer life insurance, you will find yourself shopping for a new policy, and if you are older or not in good health, you will pay more or get declined. Remember, insurance companies are not obligated to accept your application for coverage when buying an individual plan.
- Group coverage isn’t enough. Insurance companies will not give the employer the option to buy as much protection as their employees need (after all, it’s guaranteed issue, the carrier can’t ask any health questions). Most of the time, it will equivalent to two to three times the employee’s income. So, if you make $50,000 per year, you will be eligible for $150,000 at best, which barely covers a mortgage balance if you die. Note that most financial professionals suggest buying 10–20 times your income depending on your age.
- Limited choices from which to choose. Your employer may only offer term life or burial insurance up to $10,000. Each employer offers different packages for his employees, and the issue is that one size doesn’t necessarily fit all. You will find yourself with a policy that isn’t financially sound or doesn’t even make any sense. For instance, you may have a family with three young ones and a $200,000 mortgage balance, while your employer offers $100,000 term life insurance.
- If you purchase supplemental life insurance from work, you probably would pay more. The employer will provide the primary coverage at no additional cost. However, you will have the option to add extra death benefit, provided you can qualify (you will need to take an exam and answer health questions). The employer will not pay for the additional supplemental plan. Even if you are young in good health, you may pay more because the rate is typically calculated based on the group rate (some are old and aren’t in good health), so you’ll better off comparing what an individual plan costs before buying it through your job.
- We all love convenience—the art of letting others think for us. I love it too, but when it comes to something serious such as life insurance, I need to understand more about what I’m getting before I tell myself, “I’m all set, I have coverage, and it was as easy as accepting the job.” Life insurance is often misunderstood or baffling, but don’t let others make a decision on your behalf when it comes to the type of policy or the amount that fits your family. You can do some research or have a broker who can do that for you.
What to Do Next
Let me start with the obvious: If your employer offers a traditional policy for free, take it, but treat it as a supplemental plan and nothing else. Next, identify the amount and type of policy that you need and compare the rates your employer offers to an individual plan.
You will need to understand that buying a plan outside of your workplace will be rated based on your health, age, and gender among many other variables. If you are young in great health, your rate will be low.
However, if your circumstances are different, you may find your rates unaffordable or you won’t be able to get a policy at all. You can start by filling out the form on the right-hand side. You’ll be able to get instant life insurance rates from top A-rated companies.