Americans are relying more and more on employer-provided life insurance. The 2016 LIMRA Ownership Study shows that, for the first time in history, group life ownership has exceeded individual life ownership. Around 34 percent of Americans, or 108 million, own group life insurance, an increase of two percentage points, or 9 million more people, over the past six years.
The group life insurance provided by your employer is certainly an attractive option. You get it for free (or for just the income tax on the economic benefit of coverage over $50,000), and there are no medical evaluations.
But is this insurance really enough? There are five reasons that employer-sponsored group insurance may not be enough.
1. Employer-provided life insurance is not portable
Basically, that employer-provided life insurance normally doesn’t transfer with you when you leave your job. You can’t take it with you when you go, and there’s no guarantee that your next employer will offer life insurance. Plus, there is often a waiting period before the life insurance kicks in when you start a new job. All this can leave you dangerously uninsured.
It is unusual for people to stay at any one employer for very long. One study showed that Americans born between 1957 and 1964 held an average of 12 jobs between the ages of 18 and 48. Granted, this is old information, but people are changing jobs even more frequently today.
2. Employer-provided life insurance does not offer enough coverage
The coverage provided by employer group life insurance is normally only a small multiple of your salary, maybe one or two times. For many employers, coverage maxes out at $50,000 because everything above that amount is considered a taxable benefit by the IRS. You have to pay income tax on the economic benefit of that extra coverage.
The $50,000 level was set by the IRS many years ago, and frankly, $50,000 doesn’t go as far as it used to. The average cost of a funeral is between $7,000 and $10,000, which means your heirs will be left with about $40,000 to take care of your other affairs. That’s not a lot, especially if you have student loans, car loans, mortgages, or dependents. If people are depending on your income, they will run out of money very quickly.
To put the one-to-two-times-your-salary coverage provided by employer group life in perspective, take a moment to determine your economic replacement value. This determines how much individual insurance coverage you could potentially qualify for. Someone between the ages of 18 to 40 could qualify for up to 30 times their income as the amount of their death benefit.
3. Employer-provided life insurance is over-priced
Of course, I’m not talking about the free benefit offered by your employer, but often you have the option of buying additional coverage from the employer at your own cost. Also, if you are leaving your employer, you may be given a chance to convert the coverage to an individual policy. This optional insurance may be very expensive, particularly if you’re young, because it’s priced on a guaranteed issue basis — everybody who works at an organization is covered, regardless of their health. Insurance companies therefore price the coverage at a point that will make it profitable to insure older people in poor health. People who are younger and healthier will pay a lot more by getting this optional coverage than they would if they applied for an individual policy on their own.
4. You risk becoming uninsurable
Generally, people don’t think seriously about getting insurance until they have a mortgage or a family to protect. And, yes, you certainly need insurance once you get to that point. Many people think that the free employer-provided insurance is enough to cover their needs before that time.
Young people should realize that time is not their friend. If you wait the 10 years until you have a mortgage or a family, the insurance will cost you more. If you’re in the best rating class at 25, there’s no guarantee that you’re going to be in the best rating class at 35. It’s not only because you will be older, but you may also be less healthy. It’s possible that your health might make you uninsurable. Getting permanent life insurance when you are young and healthy locks in low premiums or costs of insurance and also locks in your insurability.
The longer you wait to purchase life insurance, the more life insurance costs.
5. There are no “living benefits” to employer group life insurance
Most employer-provided group life insurance is typically bare-bones term insurance. I’ve written in the past about the living benefits of life insurance, which depend on the accumulated cash value of permanent life insurance. Group term insurance only provides a death benefit. Permanent insurance provides a death benefit and can do additional things for you and your loved ones. Not only does it protect your heirs at your death, but it also provides an asset that gives you access to cash along with providing benefits that cover expenses if you become chronically ill.1 Your employer’s coverage typically won’t offer these sorts of benefits. Not only are you getting a small amount of death benefit, the policy offers no significant living benefits.
Let’s review the bidding here: the group life insurance provided by your employer is a nice benefit, but it should not be relied upon to take the place of an individual life insurance policy. Group life insurance generally is not portable when you leave your current employer; it normally doesn’t offer enough coverage; it is more expensive if you add on any extra insurance; you risk becoming uninsurable if it causes you to wait to get your own individual coverage; and it generally lacks the living benefits that permanent life insurance can offer.
1 Accessing cash values lowers the policies cash value and death benefit and may require additional premiums to keep the policy in force.
This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.