Work Life Insurance Low Down
Today I wanted to go over a decision that most people have to make either during open enrollment and or when their individual life insurance expires, and that is; Should I purchase additional life insurance from my employer?
Extra Life Insurance Through Your Employer
Most employers will give you a nominal amount of life insurance for free or at a very low cost. It’s typically 1x your salary or more or a little less depending on your employer. You should definitely take that. It’s free or almost free, that’s a no-brainer. You typically don’t have to show any evidence of insurability for this coverage, meaning the insurance company will not look at your health. This is what is called a group policy. The risk for the insurance company is spread across a large pool of people.
In addition to that coverage, the life insurance company covering the group will offer additional life insurance for a certain price. The life insurance company will usually have a chart which will show the costs for your age and coverage amounts. For the additional coverage, most companies will make you fill out a health questionnaire before you can qualify.
Advantages & Disadvantages of Additional Insurance through Your Employer
The advantage of getting the employee sponsored life insurance is the ease of which it can be obtained. There usually isn’t a health exam and coverage can be obtained very quickly. Also, some companies will not require a health questionnaire which will benefit those who have previous medical issues.
The disadvantages of buying extra life insurance through your employer are many. First, you cannot take the policy with you when you leave your company or if you can it will be really expensive to convert it to an individual policy. Therefore, you take the risk that if you leave your employer for whatever reason you will be without any life insurance. In addition to being older, your health status could change making you uninsurable in the future. Then you’re stuck without any life insurance the rest of your life. I unfortunately have had this conversation with many people who were in that exact situation. It’s never a pleasant conversation.
On top of that, your employer can drop your policy every year. Group policies are typically annual coverage, meaning if your employer wishes to drop the life insurance plan, you would be without any coverage at that point. I talk to people all the time who say their employer used to offer extra life insurance but due to the economy and rising costs of running a business their company dropped the group life insurance benefit.
Another disadvantage of the group life insurance is the amount of coverage you are able to have. Most companies cap the extra life insurance at $300k or $500k. For many, that is simply not enough money to replace their income for the next 20 years if you were to pass.
Individual Life Insurance
Individual life insurance is a policy you purchase on your own outside of your employer. It’s your policy and you can take it with you no matter where you work. Also, once you activate the policy it cannot be taken away from you regardless of your age or health. For example, if you were to get a $1 million 30 year term policy, once the policy is activated you were to have a heart attack the next day your rates would still be locked in at the price you had before the heart attack for the next 30 years. The individual policy usually does require a brief health exam at the insurance company’s expense, and will require underwriting to determine your rate based on your health and other factors.
Advantages vs. Disadvantages of Individual Life Insurance
The advantage of getting your own policy outside of work is that it cannot be taken away from you. It’s your policy and is not tied to your employer in any way. This is unlike the extra coverage with your employer which can be dropped every year and the policy will not go with you if you leave your job, (or will be almost unaffordable if you were to convert the group policy to an individual policy.)
Another advantage of having your own policy is that your coverage is fixed for the term. The price will not increase every year. If you do a 30 year term for instance, then regardless of age, health or employer, your rate will not increase. Your rates are locked in like a mortgage.
The only real disadvantage of getting your policy outside of work is that you will have to do a brief health exam which really isn’t that big of a deal, the life insurance company pays for it. Also, if your employer policy doesn’t require a health questionnaire and you have major health problems then in this instance the group policy would probably be a good option.
Examples of Costs for each
A friend of mine recently asked me if he should get additional life insurance through his employer or on his own. We did a comparison using the costs for each and it wasn’t even close. He is married, has two children with a mortgage. He’s in good health no real medical issues. He sent me the benefits summary (costs) for the voluntary term life insurance through his employer. After we ran the numbers we concluded that he could get 2.5x more coverage AND lock in the rate for 20 years for the same price by getting his own policy instead of that of which his company could provide. It was a no-brainer.
Looking at the chart here’s how it breaks down. For a 35 year old it is $10.80 month for $100k of coverage. If he gets the additional $300k policy with his employer he will be paying $32.40 a month for $300k of coverage. This coverage is year to year, meaning the price can go up next year or be taken away altogether. On top of that if he decides to leave his company the coverage will not go with him.
Let’s look at what he can get if he got an individual policy. For $750k policy on a 20 year term at the best rate class, the price would be $30.67 month. As you can see he is getting more than double the coverage for less money AND the rate is locked in. Also, the policy and rate will not change regardless of his employer, age or health.
Obtaining your additional life insurance through your employer could be disastrous. Every year your policy could be cancelled. In addition, if you were to leave your employer and now have a major health issue you may be uninsurable and have to go without any real life insurance for the rest of your life. And if you do qualify it may be very expensive.
Also, depending on your age, most people can usually obtain more coverage or obtain a comparable amount of life insurance at a cheaper price outside of your employer. Also, having your own policy means it’s yours. Again, the policy and rate will not change regardless of his employer or health. Unlike the group policy, which can be dropped by your employer every year.
The only time I would choose the extra life insurance through your employer is that if you have a significant per-existing medical condition and the group policy will not ask about your health status. Or if you only need a policy for a year or so and don’t feel like doing a health exam then the group policy may be a good choice. For everyone else getting your own policy outside of work will be the best option to guarantee that you will protect your family for years to come.
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