Many Americans first learn about life insurance when entering the work force through their employer sponsored plan, also known as a group life policy. For some, there are many advantages to this workplace benefit including very little out-of-pocket cost and little to no medical underwriting. They may consider this option a no-brainer. While others, especially those early on in their careers, could find this to eventually be a financially devastating decision. The purpose of this article is to help educate and inform you on the perils of the “I get that at work” thinking.
Over your lifetime, you will most likely outgrow group life coverage, not only from an income replacement perspective but also a needs-based perspective. The archaic thinking of securing life insurance through your employer at the lowest possible cost can lead you down a dangerous path, putting you and your loved ones at risk.
Here are several key distinctions between group and individual life insurance policies:
Overall cost
As stated earlier, most group life insurance policies offer clients savings while they are young and healthy, but upon further inspection, this might not always be the case. Many employers today provide 1-2 times salary at no cost, but once one elects the opt-in additional coverage over and above, this can be a very expensive option, as these plans are typically a ‘one size fits all’ solution. Healthy individuals are charged the same as high-risk candidates, as there is no benefit of medical underwriting to gauge the risk – or lack thereof – in employees. This leaves healthy individuals paying a higher rate for the additional coverage than they could have obtained in the individual life insurance marketplace.
By acquiring an individual life policy outside of your company-sponsored plan, healthy individuals can access a much more affordable option that will also provide some additional benefits that will be outlined later in this article.
Coverage amounts
Many group life policies offered by employers are very limited in the amount of death benefit individuals can secure. Often it is small multiple one to two times an individual’s current salary not including any bonus, commissions or other forms of compensation. Solomon Huebner, Ph.D., was widely recognized as the “father of insurance education”… inventing and defining the term “human life value,” which he defined (in his book The Economics Of Life Insurance) as:
…the monetary worth of the economic forces that are incorporated within our being, namely, our character and health, our training and experience, our personality and industry, our judgment and power of initiative, and our driving force to put across in tangible form the economic images of the mind.
That said, many financial professionals typically recommend 10-20 times your annual income to satisfy your death benefit need. Unfortunately, this means that many company-sponsored plans are not enough, especially group plans that cap the amount of death benefit available to their employees.
Additional Living Benefits On Individual Policies
Three specific benefits to securing an individual policy are Waiver of Premium, Conversion Privilege and Accelerated Benefit Riders. While these sound like complex and confusing terms, I will very simply define them and provide some reasons for importance below:
Waiver Of Premium- This is a rider available on individual life insurance policies that states if the payor/owner (depending on the carrier) becomes physically disabled, the policy is then paid for by the carrier, making this plan self-completing in the event of a physical disability.
Conversion Privilege- Allows an individual to convert their term life insurance policy into a permanent life insurance policy without medical underwriting. As individuals get older typically their health deteriorates sometimes making them uninsurable. This rider allows the individual to keep life insurance in place regardless of their health condition.
Accelerated Benefit Riders- Are components of life insurance policies that allow a significant portion of your benefits to be withdrawn and used during one’s life for end-of-life situations, such as long-term care, terminal illness/hospice care, permanent nursing home care, or extreme medical conditions such as organ transplants.
Portability
Portability is a fancy term that means your policy does not come with you if you change employers. Individual Life Insurance Contracts follow you from employer to employer as long as you continue to pay the premiums. But, even those who have dedicated many years of their life to a company aren’t necessarily guaranteed coverage either. As part of your company benefit, you assume that if anything were to happen to you, your company’s group life coverage would provide funds to cover family expenses upon your death. Now imagine that 10, 15 or 30 years later, your company goes back on that promise, and your dependents lose coverage. Unfortunately, this has become reality for thousands of Sears retirees who lost their group life insurance coverage when the company revoked the benefit earlier this year. Not only has this completely upended their personal finances, but as retirees, many of those affected have likely become uninsurable – unable to obtain individual life insurance coverage.
The lesson to be learned here is by assuming personally responsibility for your life insurance coverage; you will control objectives you want your life insurance to accomplish.
Is it time to audit your life insurance plan?
Having an individual life insurance plan is a necessary precaution to take in order to achieve financial security and provide your loved ones the safety net they need. Do not subscribe to the old ideology of “my employer will take care of it” to find out the new policies and benefits could have prevented your family from financial catastrophe.
Registered Representative. Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/ SIPC. Investment Advisor Representative. Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. New South Wealth Management and Cambridge are not affiliated.