Posted on January 23, 2016
Many companies offer group life insurance to their employees as part of their benefits package. While group life insurance is a valuable part of the financial profile, it may not be fully covering you like you thought, and, often at a higher cost.
Benefits
Group life insurance can be beneficial because it features:
- Income tax-free death benefit.
- Minimal or no medical underwriting.
- The potential to add additional coverage for a dependent.
However, it can be a one-size-fits-all type of policy. Depending on the plan, the amount of coverage may be fixed, you probably can't choose the insurer and the type of policy is limited. You typically get the same policy as any co-worker in your company. Individual life insurance that is purchased from a life insurance company of your choice.
Working with your financial professional, you can apply for:
- The amount of coverage that you need to protect your family.
- The type of life insurance policy and the coverage period.
- Coverage from a financially strong, reputable company.
While both types of insurance have their benefits, it is also important to understand the differences.
Portability
With group life insurance, you don’t “own” your policy. If you were to resign or become terminated from the company, the group life insurance policy may not go with you. Once employment is terminated, typically so is the insurance.
Some group life insurance plans do offer portability, but often contain strict requirements and higher premiums than an individual policy.
With an individual policy, you are the owner. If you transfer jobs or retire, the life insurance can continue as long as the premium is paid.
Cash Value
Group plans typically do not build equity in the form of cash value. Depending on the type of individual life insurance policy owned, you may have the potential to build cash value. Permanent life insurance like universal life and whole life have the potential to build significant cash value. Cash value can be accessed, through loans and withdrawals3, for an emergency or any other purpose you have in mind.
Health-based Pricing
One of the best benefits of group life insurance is minimal or no medical underwriting. However, this can be a double-edged sword. If not paid by your employer, you can pay the same premium whether you are in great health, not-so-great health or a smoker.
Most individual life insurance policies are medically underwritten. If you are in good health and a non-smoker, you will likely have a lower premium than a person who is not in good health or who smokes.
Maximum Limit
Group life insurance often has a set coverage amount, which may not adequately cover your life insurance needs. Depending on the plan, additional coverage may be available up to set plan limits.
Most individual life insurance carriers base their maximum coverage limits on a multiple of income. The amount will often exceed what is obtainable through a group plan.
Guaranteed Premiums
Group life insurance premiums are typically based on company experience, and subject to potential increases (which can be passed on to the group participants). If the insurer raises the group premiums and passes the increase to the employees, the participants in the plan can be impacted.
Individual life insurance premiums may be subject to increase, but it depends on the product chosen.
- Term insurance, offers a guaranteed premium for a defined time period. Once the period is up, the premium increases each year.
- Universal life insurance has flexible premiums and may require you to increase your planned premium or pay unscheduled premiums in order to ensure the policy does not lapse.
- Whole life insurance has a guaranteed level premium that never increases.
Start the Conversation
Group life insurance can be beneficial and provides death benefit protection at attractive rates for those who may have health problems. But, understand the limitations of your group insurance plan.
Start the conversation with your financial adviser to see how an individual life insurance plan can supplement your group life insurance coverage and provide the amount of coverage you need to support your family.
Insurance products issued by The Ohio National Life Insurance Company and Ohio National Life Assurance Corporation. Guarantees are based upon the claims-paying ability of the issuer. Product, product features and rider availability vary by state. Issuers not licensed to conduct business in NY. Clients should consult their financial professional on all tax matters.
1 Based upon the individual life insurer’s underwriting requirements and limits, which are often higher than group individual limits.
2 Additional group coverage may require underwriting depending on the plan.
3 Loans, and withdrawals, if taken, will reduce the death benefit. Loans and withdrawals from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the loan or withdrawal is taken and, if taken prior to age 59½, a 10 percent federal tax penalty may apply. If tax-free loans are taken and the policy lapses, a taxable event may occur.