Once a year, this strange phenomenon occurs called “open enrollment.” For most people, “open enrollment” is time for the fine art of pretending that if you ignore something it will go away and it always works out that way. However, what most people don’t realize is that in this case, ignorance is certainly not bliss and they are overlooking a very important part of their overall planning that can have a dramatic impact on their future and the future of their family.
This post will discuss the basics of group life insurance with a follow up post on group disability insurance. These topics will be explored further in the future. Almost all employers offer group life insurance to their employees. This coverage is a valuable starting block for anyone who has a need for life insurance, which includes anyone who has somebody who is financially dependent upon them such as a spouse, children, etc.
What is Life Insurance?
Life insurance is the type of insurance that pays a benefit to someone when the insured passes away. The most common usage of life insurance is to provide a benefit to a spouse, a domestic partner, a child or children. There are many other uses for life insurance but these will be the most common for most employees. The life insurance is used by the beneficiary (person receiving the benefit) to pay for the mortgage or rent, household expenses, education costs – basically anything that the insured’s income paid for. Determining the proper amount of life insurance is widely debated – however, the key is to make sure there’s enough to replace your income for those who are dependent on you. There’s a variety of tools and calculators on my website at www.lifeinsurancesage.com
What’s the Typical Group Life Insurance Coverage?
Group life insurance coverage usually provides 1 times annual salary up to a pre-determined maximum amount of coverage (can be 2 times salary or more). Employers will often also offer supplemental life insurance coverage in additional multiples of annual salary (2 times salary, etc.). Basic coverage (multiple of salary) is paid for by the company and is guaranteed issue. That is that the insured/employee does not have to go through any sort of underwriting. This coverage will have a premium that increases either annually or at 5 year increments based on age. Coverage will usually also terminate at separation from the employer.
Supplemental life insurance is additional coverage that’s usually purchased either in certain amounts ($25,000 increments for example) or by multiples of salary up to a certain dollar amount. This coverage is paid for by after-tax dollars, which results in an after-tax death benefit. This coverage is subject to underwriting (subject to medical history, etc). Supplemental life insurance coverage is often portable.
Group life insurance is usually term life insurance, which is insurance that pays a death benefit and does not accumulate any cash value. Some supplemental life plans will be various forms of permanent (cash value) life insurance such as universal life or variable life.
Does Group Life Insurance Coverage Take Care of All My Life Insurance Needs?
Most likely not. Depending on how you calculate your life insurance need – either using a basic rule of thumb such as 7-10 times annual income (easy to see that 1 times salary is less) or more complex calculations, you’ll see that there is a significant shortfall. As mentioned, there are plenty of tools on my website at www.lifeinsurancesage.com.
Other things to keep in mind is if supplemental coverage is available – is it portable (can you continue it if you part ways with your current employer) and is it cost-effective? You can usually find individual life insurance policies that are significantly less expensive, especially if you’re in great health.