The Planner's Perspective: Evaluate Your Group Life Coverage
By Paul Morrone CFP®, CPA/PFS, MSA
Employer provided life insurance comes in many shapes and sizes, and unfortunately, there is no one size fits all solution for the employees who have access to such benefits. Many employees rely on their group term coverage as their primary (or only) life insurance coverage and don’t evaluate life insurance outside of their workplace, unless maybe they get a cold call from a pushy sales agent working for XYZ insurance company. While group term life insurance is a generous benefit, assuming the provided amount of coverage will be sufficient to meet your estate planning needs can be a big mistake.
The standard benefit industry wide is for businesses to offer their employees $50,000 of group term coverage at no cost or may offer a multiple of the employee’s annual salary as part of their benefits package. Other firms have more customized plans that allow employees to increase the coverage, usually at a cost to the employee, to an amount of their choosing, generally not to exceed certain thresholds. As a free or low-cost benefit, the value shouldn’t be understated, but a thorough insurance analysis will likely show that group term coverage is woefully insufficient as an end-all-be-all solution in a comprehensive risk management plan.
One of the largest risks inherent with relying on group term coverage is lack of control by the insured. From a policy issuance standpoint, often times group policies can’t be trust owned and may have restrictions regarding who (or what) can be listed as beneficiary. For those that bear the cost of their group insurance, healthy insureds may not see reduced premiums as there is generally no medical underwriting and thus no rating scale at the participant level in the group plan (i.e. everyone of the same age and sex pays the same rate regardless of health status). This may make group coverage a more expensive alternative than a private policy for the same amount of insurance depending upon age, sex and medical background.
Like any employee benefit, your group coverage terminated along with your employment, and in most cases the polices are not portable. Of course, not all terminations are voluntary and an unexpected change can leave you with little to no time to obtain coverage if your position is suddenly eliminated. Your coverage may also terminate or be suspended if your status at work changes (i.e. full-time to part-time) or if your employer decides to change or eliminate coverage for the entire employee population. Unfortunately, those who leave work for medical reasons are those that will likely need the coverage the most and will likely not be able to obtain a policy in the private marketplace because of a now known medical condition.
There are benefits to employer provided coverage, however, as those that may be uninsurable due to preexisting conditions or age may have access to insurance through a group plan when they may not elsewhere. Additionally, smokers or those with longstanding medical conditions may be able to get coverage through their group plan at a more reasonable cost than through a private policy. Insurance table ratings can substantially increase quoted premiums which may make it cost-prohibitive to obtain a private policy for many individuals. Those at the end of their career who don’t have any previously established insurance policies in place may benefit from group coverage as a cost-effective way to maintain coverage for income replacement during their last few working years.
Tracking # 1-835001