Pros and Cons of Group Life Insurance
By: Cameron Diehl, CFP®
Friends – A primary focus of my practice is helping clients manage financial risks – because at the end of the day, even the best laid and maintained plans can be derailed by unforeseen tragedy with very negative consequences for those you care about.
One of the most important tools for managing risk is life insurance, and one of the most common forms of life insurance is group life insurance through employers. And while group life insurance is a great benefit for employees, it is very often not sufficient on its own and may leave employees exposed to certain risks over time.
That being said, below are a few quick thoughts on group plans and life insurance overall.
Most of us need life insurance –
In short, if you have someone that relies on you for their wellbeing, you should consider life insurance. This includes dependent children, a spouse, other family members or even a business. Coverage should be sufficient to cover outstanding debts / final expenses, fund any additional financial goals and provide ongoing income to make up for a gap left behind. This can be a very involved and personal conversation that should be discussed as part of the overall financial planning process.
Group life insurance is easy –
Many employees are eligible for group life insurance through their employer that is often free or heavily subsidized. It is usually extremely quick and easy to enroll with little to no paperwork or underwriting. Supplemental coverage beyond the base amount offered is often available and can be similarly convenient. This type of coverage can be a great starting point and is certainly better than nothing.
Group coverage isn’t always the cheapest –
When you enroll in a group plan, you are placed in a pool with everyone else in your group and if you are in good health, because everyone pays the same premiums, you may be unknowingly subsidizing coverage for less healthy or higher risk employees. For this reason, I always recommend obtaining quotes to compare the cost of coverage elsewhere.
Costs can increase over time –
Another consideration with group policies is the costs are not guaranteed beyond the current year. With any life insurance, your cost for a new policy will go up as you age, all else being equal. The same is true with group policies where your coverage is re-priced each year based on your current age. Most plans will publish tables showing how rates go up over time, often significantly. So, while coverage may be inexpensive when you are younger, rising costs over time can make group coverage less economical. A better alternative for many would be locking in your current rate for a period of time with a separate term policy that carries level costs over the life of the policy and guarantees you coverage for that time period.
Group coverage may not be enough –
Typically group plans have limits on how much coverage you can obtain, which is often insufficient based on the calculations I outlined above. If nothing else, it is often necessary to obtain additional coverage to make sure you’re fully managing risks.
It may not always be there
– There are various reasons why you could lose coverage through group life insurance. The company could discontinue the plan to save costs, you could leave the company and wind up somewhere that doesn’t offer it, etc. The risk here is that you rely on group insurance, develop a condition that makes you uninsurable or makes obtaining coverage prohibitively expensive and then lose your group coverage, leaving you vulnerable with few options.
Cover your bases
– My advice to my clients, especially parents with young children, is to lock in whatever coverage you calculate you need as early as possible, because you never know what could happen tomorrow. Diagnoses happen all the time and can have a significant negative impact on your ability to obtain affordable coverage and ever year you wait adds to your costs. Protecting your loved ones is too important to neglect.
If you have any questions about your coverage or how life insurance should fit into your overall plan, please don’t hesitate to reach out. I’m happy to help.
Any opinions are those of Cameron Diehl and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. These policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company.
