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Saturday, April 28, 2007

Group Life Insurance: Is it Enough?

Group life insurance, which in most situations is offered by your employer, provides coverage at a reasonable rate. While group life insurance can be a great deal, it might not provide enough protection. If your group life policy is the only life insurance you own, you could be open to financial disaster.

The group advantage

In most cases, you purchase group life insurance through work. Your employer owns the policy, and the employees are the "insureds." You can get group life either as an employee benefit (meaning you don't have to pay for it) or on a voluntary basis (meaning you open your own wallet).

If you receive the policy at no cost, the most common type of coverage is usually a full year's salary payable to your beneficiaries at your death. Some employers with limited budgets might offer smaller policies with face amounts of $5,000, $10,000, or $20,000, depending on your position and seniority at the company. At the other end of the spectrum, larger companies with unions, such as auto manufacturers, might offer very generous death benefits that total two or three times a person's salary.

If your company offers group life on a voluntary basis, the coverage is generally more extensive. The size of your death benefit can vary, but can be several times your annual salary. Some larger employers offer group life plans with a maximum death benefit of $1 million. There are also group life policies under which your spouse and children can get coverage.

Most group life plans are term policies that provide life insurance protection for as long as you work for the company. There are also some employers that offer whole life policies, so you can have permanent coverage after you retire or leave the company. Unlike some individual life insurance policies you could buy on your own, premium rates are rarely locked in. Premiums usually rise every five years because the risk of deaths among the group increases, as employees grow older.

Group life on the cheap

Group life insurance tends to be inexpensive because the insurance company is calculating the overall risk of the group. The chance of everyone at a company dying simultaneously is so small that the cost of insuring a group is cheaper on a per person basis than insuring an individual.

The insurer also assumes that not all people at the company are going to work there until retirement, so the length of the insurance term is relatively short.

A typical universal life group policy for a person in good health at a normal job would cost 5 cents for every $1,000 worth of coverage per month. So for a $100,000 policy, it would cost you $5 per month, or $70 per year.

Poor health? No problem

If your employer gives you group life insurance free of charge, you often don’t need to undergo any medical examination. Most of these are "guaranteed issue," meaning you will qualify for insurance regardless of your medical condition.

When you have the option of signing up for group life insurance through work, those policies usually require applicants to fill out a short questionnaire about health and lifestyle. If a severe health problem is found, insurers will likely require a medical exam, which includes giving blood and urine samples.

When setting a group life rate, an insurer figures in the ratio of females to males (females generally live longer, according to mortality tables), as well as how many smokers are in the group. It also takes into consideration the nature of the work at the company. A bank, for example, would likely have a cheaper group life rate than a construction company.

Think "supplement"

If your employer offers group life, it can be a nice supplement to your existing life insurance if you have it. It's important not to count on group life as your main source of life insurance. Most group life policies, whether you pay for them or not, don't offer enough coverage for your beneficiaries. One or two years of salary, the level of coverage offered by many group insurance plans, would fail to provide complete financial protection when the key breadwinner in a family dies.

Perhaps the biggest drawback to group life is when you leave your job, you’ll probably lose the coverage. Worse, when you leave your job, you might have trouble buying life insurance elsewhere if you've developed a severe health problem.

Some employers will let you continue your life insurance with the group after you leave the company or retire (if you want the option, it will likely cost you 10 to 25 percent more in premiums). Even so, there’s a chance the employer will discontinue the insurance, or switch to an insurance plan that might not take you on.

"The biggest downside to group life is that it's not always portable," says Michael Snowdon of the College of Financial Planning. "If you're counting on [group life] as part of your risk management plan and you change jobs or your employer decides to not offer the insurance any more, you could be hurting."

Jerry Rosenbloom, a professor at the Wharton School at the University of Pennsylvania, says another downside to group life is it does not leave you with a lot of coverage options. For example, if you want a long term care rider on your policy, you would likely have to look elsewhere than your group life policy.

"It always comes down to what your needs are," he says. "You may not have anywhere near the options on a group term as you would with an individual policy. [Group] policies are pretty much standard vanilla."

"It's not a bad deal," says Michael Snowdon, an instructor with the College for Financial Planning in Denver. "It can be a very cost effective way to add to your life insurance" if you already own a policy.

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