Do I Need My Own Insurance If My Company Offers It? [Life Insurance]

It's Open Enrollment time! As you look through your company benefits to see what's right for you and your family, we're here to help answer questions about your company's offerings and what they mean to your finances. We've covered the ins and outs of group disability insurance, and today we want to walk through group life insurance: how it works, when it's appropriate, and what questions to ask to make sure you know the ins and outs of your plan! So, just in case it can help, here are some questions to ask when reviewing your group life insurance policy ...

Is It Life Insurance ...

It's pretty straightforward: life insurance pays a certain amount of money to your family when you die. While there may be certain acts that would cause a policy not to pay, such as death while committing a crime or, in some instances, suicide, generally you die and the company gives your family the money. If you're wondering why I'm spelling this out, it's because unfortunately companies don't always highlight the differences between group life insurance and the subject of the next question ...

... Or Is It AD&D?

AD&D IS NOT LIFE INSURANCE!!!!ARRGGGHHHHHHHHH!!!! O.K ... now that I've cooled down, let me explain the difference. AD&D stands for Accidental Death and Dismemberment. While these policies are there to provide a death benefit, they only do so if you die as a result of an accident. It also pays a living benefit to you if you're dismembered, e.g. losing a limb or your eyesight. But AD&D is not life insurance, as it leaves a number of circumstances uncovered, such as death as a result of an illness or old age. Because the number of instances where it will pay a death claim are limited, the cost is typically lower than life insurance. Unfortunately this has caused many a consumer to think they got life insurance at a steal of a price, when in actuality they have a policy that doesn't cover many common causes of death. This is the source of my frustration, along with the fact that some advisors promote AD&D to consumers without explaining its limitations as well. Make sure that when signing up for group coverage that you are signing up for pure life and disability insurance first, with AD&D only used as a supplement.

Is My Policy Portable?

If you read our post about term life insurance, you'll recall that life insurance companies will offer insurance to individuals that covers the risk of their death for a set term (typically 10-20 years) at a fixed price. At the end of this period, that agreement expires, and you must either apply for a new policy or convert your term insurance to permanent insurance. Group insurance works differently, as many group policies expire as soon as you stop working for your organization. If this is the case, the policy is not "portable", meaning you can't take it with you when you leave your job. It's very risky having coverage that your family will need upon your death in the form of a group policy that isn't portable. There may be some "want-to" items that are appropriate to plan for with group coverage, but don't depend on using these policies to pay for any "need to" items if at all possible. As an example, your spouse may WANT to pay for your child's college tuition with your life insurance proceeds. Using group coverage for the amount needed to accomplish this goal might be appropriate. But if they NEED the house paid off in the event of your death, that coverage amount should be purchased via individual insurance if possible.

Will The Death Benefit Be Taxable?

As with group disability insurance, there are certain requirements that must be met if you or your family are to avoid paying income taxes on the benefits from group life insurance. Ask your benefits representative if the proceeds from your group life insurance policy will be taxable to your beneficiaries. Should you find out that the benefit is taxable, make sure your family will still have enough to pay for the things the policy was intended to cover. Should it fall short of these needs, sign up for additional coverage through your job or with an individual policy of your own.

Does It Have A Reducing Benefit?

If you're one of the few people who puts in a solid 30-35 years with the same company and then retires, you might see your employee benefits as a certainty. You've had them for so long, you just assume they'll be there when you need them. Unfortunately, most company benefits have a number of conditions if you'd like to keep them after you stop working for your organization. Some companies offer group life insurance with a benefit that reduces once you reach certain ages. For example, a company policy might say that at age 70, benefits reduce by 5% a year for 10 years. Families who need a certain amount of coverage would see their benefits reduced, and then have to find individual coverage later in life, which might not be cost-effective. Group policies also are often paid for, at least in part, by an employer. Once you retire, you may have the option of keeping the policy, but only if you take on the full cost of coverage. Families who can't afford the new rates would also be forced to look elsewhere. I'm trying to avoid beating a dead horse, but the possibility of increased cost in retirement is another reason to purchase individual insurance when avaialable.

Am I Healthy Enough To Get My Own Coverage?

If it's not already clear, I'm a strong believer in purchasing the coverage your family needs in individual policies. While it's great that employers offer group life insurance at group rates, it often lacks a number of the benefits and dependability of individual coverage. The rapidity with which people switch jobs and professions only strengthens my opinion, as having coverage your family needs with an employer you're statistically likely to leave is a big risk. That being said, there are some who are unable to qualify or pay for coverage outside of their job, either because of health concerns, the cost of coverage, or both. For people who have no other options, group insurance can be a lifesaver. If you find yourself in this position, purchase as much as your employer will allow and you can afford. But if you can qualify and pay for coverage independent of your employer, it should be your first option.