If we got a dollar every time we heard someone say “I don’t need life insurance, I have it through work” we probably could have retired years ago.
Life insurance through work is a nice benefit to have available, and you should definitely take any coverage that your employer provides at no cost. However, it should not be the only policy you have to protect you and your family and simply relying on your employer’s life insurance could cost you a lot more than anticipated.
Here are a few things to consider about your group life insurance policy through work:
- What happens to the life insurance if you leave your job? Hardly anyone works for the same employer their entire career these days. Most people will not even stay in the same job for more than a few years. If you leave the employer, you may have an option to convert all or part policy from work to an individual one. However, it is typically extremely expensive. For anyone in reasonably good health, the cost of conversion will most likely be significantly higher than buying your own individual policy. Unless it is your only option to secure a policy, this is not the most ideal option.
- The benefit amount is usually limited. Typically, the maximum death benefit will be around 5 times your annual income or a fixed dollar amount. If it is a fixed dollar amount, it is usually somewhere between $100k and $500k.
- Most employers provide a basic level of coverage and anything over a certain amount requires Evidence of Insurability. Evidence of Insurability requires you to be healthy enough to qualify. For example, an employer may provide a basic benefit of $25,000 to every employee at no cost. The employee may be able to elect up to $100,000 without answering any health questions but for amounts over $100,000 may require you to be health-qualified and not everyone will be able to do that.
- The cost of coverage increases in 5-year age bands. As you get older it gets significantly more expensive, especially after age 50. When you get to the age 65+ age bands, the cost could become astronomical. Also, with most group policies, the coverage amount automatically drops by 50% or more at ages 65, 70, or 75.
- Unlike personal life insurance, the rates are not guaranteed, the insurance company can raise the cost at any time. The insurance company can also terminate the contract with your employer at any time, possibly leaving you with no coverage. If your health gets worse, what would it cost you to go out and buy a policy on your own at that point? What if you are unable to qualify for coverage at all?
- If the employer changes the policies/companies, you must take what they give you and the replacement coverage may not be exactly what you want or need. When you purchase your own policy you have a plethora of companies to choose from and can choose the benefit amount and number of years that the rates are guaranteed.
- Typically non-smokers and healthy people are penalized because the company looks at the average health of all your co-workers as part of a group. In a random sample of 1,000 employees, some percentage of them will be sickly or are smokers, and that effects the overall rates that the group has to pay. A healthy employee is effectively subsidizing the cost of the unhealthy employees.
- If your employer goes bankrupt or out of business, all of your coverage will terminate. The only option will be a conversion (if that is even available) and for most people that will be cost-prohibitive.
Before you sign up for the life insurance offered through your work, do a careful comparison of what the projected costs are over the course of 20+ years. You might save money with group life insurance when you are younger, but it might come back to bite you big time as you get older and less healthy. If you’ve already signed up for a policy at work, I would encourage you to see what options are available to purchase on your own. You just might be surprised how much less expensive a personal policy can be in the long run.
If you have any questions about group life insurance or any other types of life insurance please give us a call at 888-972-0024 or e-mail us by clicking here:
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