The Limits to Employer Sponsored Group Life Insurance Plans
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If you are considering taking out group life insurance through your place of employment, or are considering purchasing life insurance to supplement your group life insurance plan, you have landed in a good spot. This article will go through the advantages and disadvantage of both group life insurance and personally owned life insurance.
I'm Hired. Do I Need Group Life Insurance?
Group life insurance is usually NOT the first thing that new employees think about.
When first entering the workplace, many young workers are not terribly cognizant of compensation and benefit issues beyond the rate and frequency of pay.
Some concern themselves with health benefits, and retirement savings such as 401k plan options from the very start of their work careers. However, even the most diligent tend to give little thought to the life insurance options available.
The benefits and limits of group Life Insurance
The primary reasons for this indifference is that life insurance options for entry level employees tend to be either voluntary, requiring out of pocket contributions, or covered by the $50000 tax exemption for employer provided term insurance.
When employees are provided life insurance with a face benefit beyond the exemption they are required to pay the imputed income tax in accordance with IRS section 79. Additionally, any supplemental purchases must be paid for out of pocket.
This is a long winded way of saying that young people tend not to be interested in spending disposable income on life insurance. While this is not terribly surprising, things tend to change as major life events take place. Marriage, the birth of a child, the purchase of a home, and health scares tend to top the list.
When the epiphany regarding life insurance happens, the first place people look is often their employer. Employer sponsored plans, whether paid for or voluntary tend to be a good deal. Generally speaking, these are group term life insurance offerings with no medical underwriting. Importantly, these group life insurance policies tend to be sold at a reasonable rate. However, These policies do have limitations that are important to understand.
Portability and the Limits of Group life Insurance Plans
The most significant limitation to employer sponsored group life insurance is the lack of portability. Because we seldom see anybody staying with the same employer for an entire career, and there being no guarantee that your next employer will offer life insurance, the inability to take your policy with you is a noteworthy limitation.
The second limitation to employer sponsored life insurance is in reference to the inability to comparison shop voluntary or supplemental purchases. In the name of convenience, employees forfeit the option to find the best deal for their situation.
This is not to say that employer sponsored supplemental term life insurance is, necessarily, a bad idea. It most certainly is not. This type of term coverage can be particularly useful in situations where a pre-existing health condition is involved. Such cases scream for the employee to take full advantage of the offering, as he or she will be unlikely to find the same offer in the individual marketplace.
However, while it is generally a good strategy to take the base benefit offered (often 1-2 times annual salary), absent extenuating health circumstances, it makes more sense to shop around and use an individually owned policy for any supplemental coverage. In addition to the, all important, portability, you may well get a lower premium.
So, if you need more insurance than the base amount offered by your employer, or you simply feel more comfortable not having your loved one’s protection tied to your job, then the best option is to shop for that coverage with an independent agent with access to multiple carriers.
Use an Independent Agent When Looking to Supplement Your Group life Insurance
We have already mentioned the advantages of comparison shopping when looking to supplement group life insurance However, the value of that advantage hits home when you see an actual case study.
Now you should know that your story matters, and that two people in similar situations can get very different offers from the same carrier.
What you should also know, is that different insurance companies will also treat each case differently.
For example Prudential Financial may have more of an appetite for the risk that RA presents than say SBLI. In this case the underwriting grade will reflect this increased appetite.
So, if your Agent could only offer one company and you later found out that that you could have gotten a rate 25% or 47% better, how would you feel?
You’d probably be angry either at the agent , yourself, or likely both. So it’s important that your Agent represent multiple carriers.
Most good independent agents will have access to over 50 carriers. This ensures the best chance at the best rate. This is in stark contrast to your employers group life insurance plan that will usually have one carrier....Don't forget that with supplemental coverage you will be medically screened, so the non- med advantage of group life no longer is in play.
Case Study: Independently Shopping To Supplement Group Life Insurance Policy
Gender: Male Age: 43
$500000 20 Year Term
Fairly well controlled High Cholesterol
HDL/LDL ratio of 5 & total cholesterol 275
Statin use (crestor) No Other Health Concerns
This looks like a standard/preferred case that might get a better rating with one or two carriers. depending on the insurers appetite for a cholesterol risk.. Let’s take a look at the rates.
Preferred Best Rates - Preferred Rates - Standard Rates
|CARRIER||MO. PYMT||CARRIER||MO. PYMT||CARRIER||MO. PYMT|
This table which shows only a few of the major life insurance companies available illustrates the difference in rates. For standard rates Prudential is 12.5% more expensive than Lincoln.
On it’s face this seems like a pretty straight forward choice and if underwriting grades between carriers is the same, it really can be that simple.
This kind of easy price shopping is particularly useful for younger folks in good health and demonstrates why you want to use an independent Agent.
For people who suffer from High Cholesterol or any other serious diagnosis, it gets much more complicated.
Because life insurers manage their appetite for specific risks by being more lenient or more stringent with underwriting grades, you need to know which company will grade you a preferred plus risk and which ones will grade you as standard.
In the case above Prudential (the most expensive standard rate) is likely to be the best deal because the more competitively priced carriers will likely rate the risk standard while Pru might well go Preferred Plus.
This is something you can’t know by simply looking at the lowest price. In this hypothetical using an independent agent could save you 50% (the difference between Prudential @ Preferred plus and Lincoln @ Standard.
Group Life Insurance : The Bottom Line
Regardless of the decision you make regarding employer sponsored group life insurance, make sure it’s an educated decision. Make sure that you understand the portability, or lack thereof, and the out of pocket costs. Ultimately, this is a risk management decision for you and your family. As such, simple convenience is a poor argument for avoiding the individual market. Sometimes we just have to do things because they are the right things to do.