It was a few days before Christmas and I had just gotten home to celebrate the holidays with my family. I was standing in the kitchen squinting at the picture John, my brother and his wife, Carolyn, were holding, when I quickly realized that I was going to be an aunt! I was ecstatic and could not have been happier for them. In the months that have followed, we have had fun conversations about whether they will have a boy or a girl (my official guess is a boy!), reminisced on things we remember from our own childhood, and brainstormed baby names.
In addition to the thrilling news that they were going to be starting a family, my brother also recently switched jobs from a Director of Admissions at Cornell University to a College Admissions Consultant for a company in New York. As his little sister, I felt only excitement for all the big changes going on in his life. However, the financial planner part of my brain, which never shuts off, couldn’t help but think about all the planning topics that come along with having a child and starting a new job – a big one being life insurance.
The most common question I am asked about life insurance is “Do I have enough?” While having adequate coverage is important, it is equally as important to know how it works. In my experience, most people don’t fully understand the ins and outs of life insurance offered as an employee benefit. That’s where I come in – let’s break it down!
Group Life Insurance
First of all, group life insurance (as opposed to individual) means that a single contract covers an entire group of people and the policy owner is typically an employer. This type of life insurance is then offered by the company to its workers as an employee benefit.
The Benefits of Employer-Offered Life Insurance
It’s easy. One advantage of enrolling in employer-sponsored group life insurance is the convenience factor. Most often policies guarantee coverage for all employees with very few, if any, obstacles. This is beneficial for older employees or employees with poor health who may have trouble finding affordable options through individual policies.
It’s cheap. Another huge advantage can be the cost, or better, lack of cost. Employees covered by group life insurance often pay very little, if anything, of the premium owed in return for a moderate level of coverage. Typically, a specific amount, such as $50,000 or one to two times an employee’s salary, will be provided for free. An employer may also provide the option to buy additional coverage for a relatively low cost.
The Downside
It’s limited. While the convenience of group life insurance is appealing, not understanding the limitations could be disastrous. As previously mentioned, an employer may cover a specific amount for free with the option to purchase more, however there is a maximum amount an employer can offer. The standard rule of thumb for coverage is that the death benefit should be seven to ten times an employee’s annual salary – in many cases, group life insurance alone will not be adequate. Employees often assume that they don’t need to purchase their own additional individual policy because they don’t fully recognize the limitations.
It’s not guaranteed. Not only is group life insurance coverage often not enough, but it is also not guaranteed. Employers are not obligated to offer group life insurance as part of their benefits package and can decide to terminate the policy at any time. In addition to coverage potentially being discontinued, group life insurance is also not portable, meaning that once an employee leaves the company, they are no longer covered.
It becomes harder to get. If an employee were to switch to a new job in which their new employer did not offer group life insurance, they most likely would need to buy an individual life insurance policy. However, the cost for coverage increases as people get older and applying for an individual policy often requires an Evidence of Insurability (EOI) form be completed. Therefore any medical conditions that may have developed could significantly increase rates or even make it impossible to find coverage.
Like many financial planning topics, life insurance can seem intimidating and complicated. But understanding how group life insurance works allows you to take advantage of the employer-offered benefit and still seek out the coverage you need to feel safe. For many, life insurance is a key element to instill financial peace of mind for those that will be left behind. So, ask questions – find out what your employer is offering, what coverage is available, and find a professional you trust to guide you through these big life decisions.
