Group life insurance: Is it enough?

Group life insurance, which in most situations is offered by your employer, provides life insurance coverage at reasonable rates. While group life insurance can be quite inexpensive, it might not provide enough protection for your financial situation. If your group life policy is the only life insurance you have, your survivors could be open to financial disaster in the event of your death. Even so, group life represented 48 percent of all life insurance in force in 2007, according to the American Council of Life Insurers (ACLI).

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The group advantage

group life insuranceIn 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 on a contributory or noncontributory basis. In the first case, you pay some or all of the premium; in the second, your employer pays it all.

If you receive the policy at no cost, the most common amount of coverage is equal to one year's salary, which is 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 might pay for death benefits that total two or three times your annual salary.

If your company offers group life insurance on a voluntary (contributory) basis, the coverage available is generally more extensive. You often have a choice of death benefit levels, which can be several times your annual salary. Some larger employers offer group life plans with a maximum death benefit of $1 million. Some group life policies also cover your spouse and children.

Most group life plans are term life insurance policies that provide life insurance protection for as long as you work for the company. There are also some employers that offer whole life insurance 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 for group life insurance are rarely locked in. Depending on the change in the average age of the group, premiums may rise or fall every year as the average employee age increases or decreases because of turnover.

Poor health? No problem

Group life spreads the risk

Group life insurance tends to be inexpensive because the insurance company is setting price based 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 generally cheaper on a per-person basis than insuring an individual.

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

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

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

If your employer pays for your group life insurance, you usually don't need to undergo a medical examination. Most of these policies are "guaranteed issue," meaning you will qualify for insurance regardless of your medical condition.

When you have the option of signing up for voluntary group life insurance through work, you must usually fill out a short questionnaire about health and lifestyle in order to obtain the coverage. If a severe health problem is found, insurers can require a medical exam, which includes giving blood and urine samples. Most voluntary group life insurance policies also require that you work at least 20 hours a week. If you are a temporary or seasonal worker, you may not qualify for a voluntary group life policy.

Think "supplement"

If your employer offers group life insurance, it is best viewed as a good supplement to your existing personal life insurance. It's important not to count on group life as your main source of life insurance, however. Most group life policies don't offer enough coverage for your beneficiaries. The low amounts would fail to provide complete financial protection when the key breadwinner in a family dies.

Matt Tassey, past chairman of the Life and Health Insurance Foundation for Education, says that if you leave your company due to disability, your group life premium would be waived after a six- or nine-month waiting period.

"This is called waiver of premium," he says. "The disability has to be total and permanent in order to qualify."

The biggest drawback to group life insurance is its lack of portability. If you lose or leave your job you'll lose the coverage. Worse, if you have relied solely on group life and you leave your job, you might run into trouble buying life insurance on your own if you have a history of medical conditions.

In addition, an employer can decide to discontinue group life, leaving you suddenly empty-handed.

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 or an accelerated death benefit, don't look to your group life policy.

"It always comes down to what your needs are," Rosenbloom 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."

Converting to an individual policy

If you plan to leave your job but don't think you'll qualify for individual life insurance, converting your group life policy to an individual policy is an option. While this option lets you secure insurance coverage, it has some disadvantages. First, you'll no longer pay the group rate and you'll likely have sticker shock at the new rate on the individual policy. Second, group policies can usually be converted only on a one-to-one basis. So, if your group policy is worth $20,000, you won't be able to convert the policy to a higher face amount. This can leave you underinsured.

"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," says Michael Snowdon, an instructor with the College for Financial Planning in Greenwood Village, Colo.

Larger companies sometimes offer voluntary life policies that are portable, which means you can take it with you if you leave the company. Plus, "It’s set at the same price you would be paying as an employee," says Tassey.

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