Group life insurance is cheap, or may even be free if it's included as a benefit at work. But is your group life insurance enough coverage?
Group life insurance, when included as a paid benefit, is usually offered in multiples of your salary. Two years salary is a common benefit. Voluntary life insurance is also a benefit, but you select the amount of coverage you want and pay for it, generally pre-tax, directly from your paycheck.
In some cases, the two may be combined, with an employer-paid amount and the option to add more. Even with this option, however, group life insurance may not be enough to protect your family. Read on to find out why.
Is a group life insurance policy through work enough?
Group life insurance is a great added bonus for you; however, it should not be used instead of individual life insurance. With group life insurance, the coverage offered is not always enough to take care of your beneficiaries, especially if you are the main bread winner in the family. Also, you may lose your group life insurance coverage once you leave your current job, and if you developed a health condition while working there, it may be more difficult to get affordable life insurance rates at the next place you go to.
The option to keep your life insurance after your leave or retire may be available, but it will probably cost you 10-25% more in insurance premiums. In the event your employer switches life insurance plans or cancels the one you have, you will no longer be covered.
Group life insurance through work is usually two times your annual salary, and you may have the option to buy more coverage, often in $10,000 increments. However, experts usually recommend that you have at least five times your salary in life insurance; some go as far as 10 times your salary. Odds are good you won't have that amount of coverage in group life.
Still there are benefits to a group life insurance policy, including the fact that you can't be turned down. Spreading the risk across a group means the life insurance company is less concerned about each individual's health.
Why is group life insurance so cheap?
The cost of insuring a group of people, rather than an individual person, is cheaper because the rate is based on the overall risk of the group. The insurer typically assumes that not all people who are insured will remain with the company until they retire, which in turn means a shorter life insurance term. Also, the likelihood of the entire group dying is far less likely than if you base it off of one person.
Pros and cons of group life insurance
Group life is definitely a good thing to have, but if it's your only life insurance you should be sure you're aware of both the pros and cons.
Pros
- It's cheap, and some coverage may actually be free since your employer pays the bill
- You can buy coverage pre-tax and have it deducted from your policy
- There's no medical exam and acceptance into the plan is guaranteed
Cons
- You may lose life insurance coverage if you change jobs
- Limited life insurance coverage options and features to select from
- Group policies are more standard than individual life insurance plans
You can't borrow from a group life policy or cash it in
Another limitation of group life insurance is that you can't borrow from it or cash it out. Only permanent policies, such as whole life or universal life, feature a cash value component, which is an accompanying savings account that accumulates on a tax-deferred basis. You can borrow from the cash value and use the money for any purpose, whether it's to pay college tuition or supplement your retirement. You can also surrender the policy for the surrender value. Typically the life insurance offered as an employee benefit is term life, which has no cash value.
Combine group and individual life for the best coverage
If you have only group life insurance, it's certainly better than nothing. And if you can't afford to buy an individual policy, accepting the coverage through work is definitely a good choice. That said, the best way to ensure adequate coverage is to combine both.
Group life can be seen as supplementary to your individual life policy, which is the coverage you can depend on to provide a large enough death benefit and stay in place no matter what happens at work.
To determine how much life insurance you need and what type of life insurance to buy, calculate how much money your dependents would need if you died tomorrow and for how long. Buy enough individual life insurance to cover that amount, with the group life policy as an added safety net.
