Don’t get me wrong, I’m all for group life insurance. Its an easy, hassle free way to get some life insurance. Fill out some forms at work and boom, I’m covered, I can have peace of mind and not have to worry ever again...or do I? While group life insurance can be a good source for supplemental life insurance you shouldn't rely on it too much. In this blog post i’ll cover the limitations of having life insurance only through your employer.
When you buy group life insurance there is usually no medical exam required. In addition the pricing of your policy is not fixed. For someone in their 20s and 30s premiums can be inexpensive, however as you get into your 40s and 50s premiums can be significantly more expensive for group life insurance. In addition pricing is not based on your health. There may be smoker and non-smoker rates, but if you are healthy you can usually get better premiums with an individual term life insurance policy. Not only will the rate be better, but you can also lock in a rate for 20 or 30 years knowing that your premiums will not increase.
The biggest downside of group life insurance is that you are not in control of your own destiny. That means that your company picks the insurance company and also decides on things like conversion options. If you get laid off, fired, or quit your job you won’t be able to keep the same policy in place - you are no longer part of the group. In many cases you won’t have the ability to keep the coverage at all. If that is the case you will be left uninsured especially if you won’t have a new job right away, or your new employer doesn’t offer group life insurance options.
Some companies do allow conversion of your policy into an individual policy. However the downside is that there are usually limitations and you will see a big price increase from your group rate to an individual rate. In many cases you won’t be able to convert to a cheap term life insurance policy with level premiums, rather your choice will be an expensive whole life policy.
To illustrate this example I did some googling around the web for group life conversion options. I happened to stumble on the group benefits and conversion options of employees at the University of Southern California. In this example, UNUM provides the group life coverage and conversion options and allows converting to a one year term policy (where the rate increases each year) or a whole life policy. They include conversion rates - so let’s compare them to individual life insurance options. Let’s say a 40 year old male had a $500,000 group life insurance policy he wanted to convert. If he chooses the whole life options with UNUM, the rate would be a whopping $7,805 annually!! If instead he chooses the 1 year term option the rate would be $2,620! And that is for one year term where the rate increases each year.
By comparison a healthy 40 year old can get an individual term life policy for $500,000 with a rate lock for 30 years for anywhere between $600-$1300 per year depending on his health.
Conversion options for group life are extremely expensive and generally not a good deal. You are better off buying an individual term life policy and saving money.
Besides the limitations of leaving your job, or converting the coverage from group to individual, there are also coverage limits in a group policy. Typically your employer provides a certain amount of coverage such as one time or two times salary, and you can supplement with additional coverage. However you are limited to the total coverage that you can have.
Group life is a good supplement to have, however it is too risky to have as your only source of life insurance. Leaving your employer, rising rates, poor conversion options and not having control over the types of coverage and insurance company puts the employer in the driver’s seat.
Buying an individual term life policy as your main source of insurance puts you in control. No one can take that policy away from you, you can lock in rates, choose the company, and all at prices that are affordable.