This question is one that we get a lot over the last couple of years. At IFG, we do not sell group life insurance. Our firm is an independent operation that has over 40 carriers to shop rates with. With this article, I will provide an overview of how group coverage works, the advantages of having it as well as the disadvantage of it. By the end you should have enough information to know if adding a personally owned contract is for you.
If you are lucky enough to work for a company that offers benefits to include life insurance, taking advantage of this benefit is a must. Typically there are 2 offerings to consider.
- Base benefit – this usually comes in the form of a calculation of your salary or a flat rate.
- Calculation of your salary could be 1, 2 or 3 times your income
- Flat death benefit amount such as $50K, $100K or $250K
- Usually the employer will pick up the cost of this coverage
- To qualify for this, there is only a couple of questions to be answered (we call this limited underwriting)
- Additional Coverage – This allows you to get more life insurance coverage
- The additional coverage will be at a cost to you
- Usually there will be more questions to answer, possibly exam to complete to qualify for the coverage
Often times our clients ask us about group life insurance and if it is a good deal or not. As we talk through the scenarios, 2 concerns come to mind. First is if you leave this employer, whether through termination or getting a new job or starting your own company, is the coverage portable. Meaning once you separate from the company, can you continue the coverage. Most of the time, we find that coverage cannot be continued upon separation. If on the other hand, you can keep this coverage, what will happen with the premiums you are currently paying? Will they continue at the same rate? We find that in most situations, the premiums are age banded. (i.e. 30 to 35, 36 to 39, 40 to 45 etc..) Each time you enter into a new age band, the premiums will increase. If this is the case, then some math will be needed to figure out long-term, does it make sense to keep this coverage. The one reason our clients do keep this coverage is because of insurability issues and they know they cannot get insurance due to a health issue.
The second concern is amount of life insurance offered. Typically the coverage is an amount that is usually not enough to make sure your family is taken care of. Then having to purchase the additional coverage could get costly and again, is the coverage portable?
For these reasons, adding a personally owned policy can help with providing peace of mind and confidence knowing that you have coverage regardless of employment or not. To consider this strategy, first step is to decide how much life insurance is needed in total. (an easy calculation could be using 10 times your salary) Next is getting details of the employer plan. The easy part is whatever is being offered for free, take it. Next look into the cost of adding additional coverage, this may take a couple of calculations to figure out the actual cost per pay check. Next step would be to get a quote from an independent insurance agent.
OK, so let’s do a hypothetical example so you can get an idea of how this strategy can work for you.
- Married female, age 50, good health, 2 kids and salary of $150K. Using the 10 times salary to figure out how much coverage is needed
- $150K X 10 is $1.5M of coverage of total coverage
- Group offering –
- 2 times salary = $300k (employer paid) – cost $0
- **Additional $500k (paid by employee) – cost $9.27 per pay check (26 pay periods -$241.02/year)
- **This is the most extra coverage this person was able to get through her employer
- Now compare the above with a quote if you were to buy life insurance outside of the job. $500K for level 10-year at best rates is $385/year
- Personally owned coverage
- $700K - $545.30/year
- **10 year level term – based on best rates
- $700K - $545.30/year
As you can see with the above scenario, using the group to purchase the additional coverage does make sense premium wise. Before you make the final decision, do ask the question regarding portability and if so, what happens with premiums in the future. If they are age banded, some quick math will be needed to figure out long-term if it still make sense.
If this is still confusing, we recommend a conversation with an experienced independent insurance agent to help work through each of the scenarios. Having a conversation does not commit you to using that agent but getting his experience with this type of planning and being able to shop many carriers at one time is invaluable.