Group life through work, and its limits

Employer-provided life insurance is one of the most common benefits and one of the most commonly overestimated.

What it typically provides

Basic group term life, frequently a multiple of salary — one or two times is common — provided at no cost to the employee.

Supplemental coverage, available for purchase at group rates, often up to a multiple of salary with a maximum.

Sometimes dependent coverage for a spouse and children, usually at modest amounts.

Accidental death and dismemberment coverage, frequently bundled.

The advantages

Convenience. No medical underwriting for basic coverage, and frequently a guaranteed issue amount for supplemental coverage up to a threshold.

That guaranteed issue feature is genuinely valuable for someone with health conditions who cannot obtain individual coverage.

Group pricing, which for some people — particularly older employees or those in poor health — is better than individually underwritten rates.

The limitations

It ends with employment. The central problem.

Coverage terminates on leaving, usually at the end of the month. Someone made redundant loses income and life cover simultaneously, at an age when replacing it costs more.

Portability and conversion are limited. Most group policies offer a conversion right to an individual permanent policy without underwriting, and the converted premium is typically very expensive.

Some offer portability of term coverage at group rates for a period, also at higher cost.

Deadlines are short — often thirty or thirty-one days from termination — and easily missed during a job transition.

The amount is usually inadequate. One or two times salary does not replace income for a household with a mortgage and dependent children.

A needs analysis typically produces a figure many times that.

The employer controls it. Benefits can be reduced or eliminated. Coverage amounts frequently reduce at older ages under the plan terms.

Rates on supplemental coverage rise with age, generally in bands, and for a healthy younger person individual term coverage is frequently cheaper than employer supplemental coverage.

This surprises people who assume group rates are always better.

The tax point

Under United States tax rules, employer-provided group term life coverage above a threshold amount produces imputed income — the value of the excess coverage is taxable to the employee.

The amount is calculated using a published table and appears on the pay statement.

This is generally a small amount and it is worth knowing why it appears.

Accidental death and dismemberment

Frequently included and worth understanding.

It pays only for death or injury resulting from an accident, as defined in the policy, with exclusions for illness, natural causes, and various circumstances.

Accidents account for a minority of deaths, particularly at older ages. Which means the coverage pays in a minority of cases.

It is cheap for that reason. It is not a substitute for life insurance and should not be counted as such in a needs analysis.

How to use group coverage sensibly

Take the free basic coverage. Obviously.

Compare supplemental coverage to individual term. Get quotes. For a healthy person under about fifty, individual term is frequently cheaper and is portable, which is a substantial additional benefit.

For someone with health conditions, guaranteed issue supplemental coverage may be the only accessible option and is worth taking.

Own the foundation individually. Base your protection on an individual policy you control, and treat group coverage as a supplement.

This means the coverage survives a job change, which is precisely when other things are uncertain.

Check beneficiary designations on the group policy specifically. These are separate from individual policies and are frequently outdated.

They also do not transfer between employers. A new job means a new designation form.

Know the conversion terms before you need them. Ask human resources for the certificate of coverage and read the conversion and portability provisions.

On leaving employment

Act quickly.

Find out the exact termination date of coverage and the deadline for conversion or portability.

If you are healthy, apply for individual term coverage rather than converting, which is almost always cheaper — and do so before leaving if possible, so there is no gap.

If you are not healthy, conversion may be the only option and the deadline is short.

Note also that many group policies include a waiver of premium or extended death benefit provision if you become disabled while covered. Read it, because it can preserve coverage in exactly the circumstances where you cannot obtain new coverage.

General information about insurance and employee benefits, not insurance, legal or tax advice. Plan terms, conversion rights and deadlines vary by employer and insurer. Consult your certificate of coverage and a licensed advisor.