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Your Group Life Insurance Policy Might be Limiting You

Image: Freedigitalphotos.net

Image: Freedigitalphotos.net

The following is a guest post from Liran Hirschkorn. If you would like to submit a guest post, please contact me.

A big perk for many employees is finding a job that offers life insurance through an employer based group plan or a similar. These policies can be great because they are often cheaper (or free) to the employee and usually don’t require a medical exam, which are added benefits if you are young, or have pre-existing conditions that would raise the cost of an individual term. However, there are also downsides to these group policies offered by an employer that may make you think twice about having one as your primary source of life insurance.

Constricting Terms and Benefits

Since group policies can include a large number of people they are often very limited when it comes to benefits, coverage, and options.

• Benefits: You’ll be hard pressed to find a group plan that is rich in benefits. Typically they’ll only over the basic plan, with some options to improve coverage if you’d like to follow up with them, but that’s it. There are rarely any riders, funeral expense, death from accident, or other benefits available in a group plan.

• Coverage: Many group life insurance policies that are offered through an employer are determined by your current salary. While the numbers vary, you can expect to find coverage between one and three times your base salary for a group policy. For most employees using a group policy, this will not be enough to support their family for an extended period of time. Group policies are also very limiting and if you need high risk life insurance or another specialty policy you’ll find yourself wanting more often than not with a group policy.

• Options: This is the biggest limiting factor in my opinion, and that is your lack of options. You’re stuck with whichever your employer chose and that’s it. No shopping around or comparing different group policies; what you see is what you get. You can’t just assume that your employer bought the best policy available either. They could mean well but could still be ignorant and provide a policy that will be difficult for your beneficiary to collect on or provides little help.

Shopping around for an individual term gives you the benefit of comparing multiple providers side by side, and leaves you access to choose the best policy for you. With group policies, what you see is what you get, and improvements to coverage are more limited than those in an individual plan.

Changing Jobs and Careers

An individual, term policy will stick with you for whatever the predetermined amount of time is not matter where you go or what job you have. This is not the case for an employer based group policy. If you change careers or jobs you could quickly find yourself without life insurance or with a new policy from a new employer that is drastically different or more limiting with your old one. Needless to say, an individual plan is more stable and can help to take the headache out of figuring out your life insurance after every job change. Plus, what happens to your group life insurance when you finally decide to retire?

Group policies can be a great option for those looking for cheap (or free) life insurance, people who have a preexisting condition that an individual policy wouldn’t cover, or a younger people who don’t feel like they need a life insurance policy yet but wouldn’t mind having one. There are other situations where a group policy can be beneficial as well, and this is why you need to look at all of your options before choosing to go with one policy over another.

Liran Hirschkorn is the founder of ChooseTerm.com and is an expert in the insurance industry where we works hand in hand with the best life insurance companies.

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

34 comments

  1. I wouldn’t take life insurance as an individual, so if my company offered it, that would be an extra perk. Having no dependents, I would rather invest to build wealth than rely on a company to pass something on to my heirs.

    • Pauline, that is quite understandable. Without dependents, the need or want for life insurance is greatly reduced. There are some reasons why some people still consider it (such as plans for family in the future and they want a competitive rate), but for the most part your plan sounds spot on.

  2. I’ve heard these pitfalls of group life insurance, and currently that is the coverage I have. One of my goals this year is to get my wife and me on a good life insurance plan that we can stick with long-term.

  3. I’ve always just viewed group life as a supplement to the coverage we already have. I feel that we have enough coverage in regards to term life but just viewed the group life as extra that we had but did not depend on.

  4. Great info here, thanks for sharing. I agree with John: we’ve always had group life as an extra, and not as our main coverage.

  5. I totally agree that for anyone with a family, group life is insufficient. It’s rarely enough coverage, and even if the coverage is enough, you can’t depend on it because it’s only around as long as you continue to work at the same place and they continue to offer it. Getting a individual term policy is definitely the way to go.

  6. My wife’s employer offers one and a half times base salary as a basic benefit and then additional multiples for an added cost.
    That said, they must have a funny way of determining base salary, because apparently 1.5x it works out to roughly 80% of her gross.

  7. I currently get a certain amount of free group life insurance through my employer and that’s the only one I have right now. I hope to get my wife and I good term insurance in the next year or so.

  8. You are all around Liran. Nice work. I am on a group policy and will probably take another from my credit union because I have a pre-existing condition that makes Life insurance very expensive, almost prohibitive. Group policies might be my only option.

    • Thanks for the kind words! The nice thing about group policies is that the requirements are much easier to be approved, and some only have a few health questions. Sounds like that’s probably the best option for you.

  9. Very early in my career, I worked for a Fortune 100 high tech company that had unbelievable benefits. Each year, they would give a 100 page brochure that reminded us of the great benefits personalized to each employee. It used to be called golden handcuffs! It was a great way to create loyalty and keep you.

    • Things have changed so much. It used to be that you worked for one company for 30 years and retired with amazing benefits and a pension. Today gold handcuffs are reserved for Senior Execs and CEOs only and cost cutting of benefits for the rank and file employees is much more common place.

  10. I only take whatever is freely offered through work with life insurance and have my own policy set up. I will likely increase it as my income goes up. I think I always assumed this is how it was done, so I will stick with it.

  11. Federal programs seems to be quite effective, but I’m less familiar with private policies. Great information here.

  12. It’s just the 2 of us right now – and we don’t have a lot of debt, so what we get through work makes sense. If we ever have kids – we’d have to make some changes!

  13. The great thing about group life is that if enough people sign up for the coverage you won’t have to do all the medical stuff to get the policy enforced. On the other hand. I’ve heard of these policies having some faulty rules with them such as only covering you only in the even you pass away at work. Sounds strange but I heard of this happening before.

    • Chris, you’re right that it can be much easier to get on a group plan for lack of medical road blocks – and you’re also right that some are almost impossible to actually collect benefits from. Every policy is different and I don’t want to give you the idea that this is the norm, but you’ll often find the cheaper or more lax the policy is, the worse the coverage will be. Look out for language that starts to limit the benefits in any significant way. Taking the group policy to an independent broker is a great way to get the no frills, black and white outlook on exactly what it covers, and when it will cover. Thanks for reading and for your comment.

  14. I’m fortunate that I have group benefits at work that covers me for the most part up to 100%. There is life insurance in the package but I would never rely jut on that. We both have our own life insurance policies outside of work.

    • Nice to see you here as well, CBB. It sounds like you have everything in order as far as your coverage is concerned. Congratulations on that as well. Many people go under or forgo insurance entirely because they don’t understand it.

  15. I’ve been looking into getting my own insurance coverage as we are adding a new addition to our family soon. I have group life insurance through my employer which is 3 times my salary and additional supplemental life insurance through my union. As I work in government, I felt that the job was stable and that I might stay here the rest of my career so I didn’t get private life insurance. But, I’ll have to look into it because it might not be sufficient.

    • Congratulations, Andrew! That’s fantastic news but yes, nothing makes you rethink every aspect of your finances (as well as every other part of your life!) like a child on the way. Best of luck to you and your family!

  16. We just did a 20-year term plan, which was fairly inexpensive. I’m sometimes torn about how worthwhile it is, but in general I’m glad it’s there.

    • Thanks for the comment, Nick. My clients are often very surprised at how cheap some policies actually are. As for as being worthwhile, my rule of thumb is if it helps you to sleep easier at night it is worth it.

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