Life Insurance: Why Group Benefits Aren’t Enough

According to the Bureau of Labor Statistics, 72 percent of all full-time employees in private industry had access to life insurance through their employer. Group life has its pluses, but most families will need additional coverage. Here’s why.

Unlike many other group policies, coverage under group life policies often is no cheaper than under an individual policy, at least for a healthy individual. However, group life is written on a “guaranteed issue” basis, which means that all eligible group members can obtain a minimum “guaranteed issue” amount of coverage without medical underwriting if they sign up during the enrollment period. This means that if your employer offers group life, you can obtain some coverage, even if your health would make buying individual coverage prohibitively expensive or impossible.

Limits of Employer Plans

What type of coverage do you really need? Most employers provide employee life coverage through group term life policies. Under any true group insurance program, one policy, issued to the employer, covers all employees; covered individuals receive a certificate. Term life policies differ from “permanent” life policies, such as whole life or universal life, in that they provide benefits only if the insured dies during the policy term. They do not build any cash value or redemption value. Policy terms under group policies are usually one year; under individual policies, terms are usually five or 10 years.

Permanent life policies (which can include universal and variable life policies) cost more at the outset, but as long as you keep your policy in force, the insurer cannot change your rates. Even if your health status changes, your premiums won’t increase.

In addition, many people find the forced savings component of a permanent life policy valuable. Over time, your permanent life policy will build a cash value. After it reaches a certain level, you can borrow these funds without having to qualify. You can also withdraw part of your cash value in many instances. Note that either of these options might reduce your policy’s death benefit, which your beneficiaries might need. However, a properly planned permanent life insurance policy can help you meet many of life’s expenses, including college tuition, weddings, health costs during retirement, and more.

Tax implications. The IRS generally allows individuals to exclude the cost of the first $50,000 of employer-provided group term life insurance coverage from income, if the policy is “carried directly or indirectly by the employer.” This includes policies for which you contribute part or all of the premiums (as in a voluntary plan), if premiums paid by at least one employee subsidize those paid by at least one other employee. Different rules might apply to policies that accumulate cash value; consult your tax advisor for more information.

Generally, your beneficiaries will not have to report or include the proceeds under a life insurance contract in gross income.

How much coverage do you really need? Most employees (56 percent) with employer-provided group life have plans that provide benefits as a multiple of earnings. Among these workers, most (61 percent) have coverage equaling one times earnings, while 22 percent have two times earnings. Typically, management employees receive higher salary multiples than other employees. Thirty-nine percent of workers have “flat dollar amount” coverage, which pays the same specified amount for any covered employee, often $50,000. (Source: Bureau of Labor Statistics, National Compensation Survey, March 2013.)

This amount of coverage might suffice for young singles, but most families need more coverage than this. Generally, anyone with dependents should strongly consider purchasing additional life insurance. Dependents could include your spouse, children or even elderly parents or disabled adult children in your care.

Experts often throw out generalized rules of thumb, such as having life insurance coverage that equals 10 times your annual salary. But really, your needs will vary depending on a variety of factors, including:

  • What type of funeral do you want? The cost of a funeral, including burial expenses, can exceed $10,000.
  • Are you the sole or primary breadwinner? How much will your spouse and children require to maintain their current standard of living?
  • Do you want life insurance to pay your children’s college expenses, or do you have other sources for education funds?
  • Do you want your life insurance to pay off your mortgage?
  • How much debt do you carry?
  • Does your spouse have retirement savings?

In a survey conducted by LIMRA International, 25 percent of adults surveyed admitted they should have more life insurance coverage. The actual figure is probably much higher. According to a survey by Nationwide Financial, 98 percent of consumers who are married, partnered or have dependents lack enough life insurance coverage to replace their income. The average consumer surveyed will earn approximately $1.5 million before they retire and currently holds about $300,000 in life insurance coverage, leaving them about $1.2 million short of replacing their income with life insurance.

We can help you analyze your life insurance needs and policy options. For more information, please contact us.