One of the most important pillars of any financial plan is life insurance. Insuring your life is one way to help your loved ones cope financially with the loss of your life. Without it, families of the deceased may find themselves needing to sell their home, downgrade their lifestyle and even cash out retirement funds just to pay the bills. Every income-earner should consider life insurance as a way to protect their financial dependents from income loss as a result of their untimely death.
There are two basic types of term insurance: Individual contracts and Group plans.
Individual contracts are policies that you apply for independently through an insurance broker or directly with an insurance provider. These can be tailored to meet your individual needs and are often purchased on a guaranteed renewable provision – allowing you to continue to insure your life each time your contract is renewed regardless of your health, albeit with increasing premiums due to age.
If you are fortunate enough to work for an employer with medical benefits, you may be enrolled in a group life insurance plan, perhaps without even knowing it. Many employers automatically enroll employees for 1x or 2x their salary and, depending on who is paying the premiums, you may find that this is treated as a taxable benefit at tax time.
Group insurance is also available through certain organizations and associations. Examples include university alumnae, trade associations and Chambers of Commerce insurance plans. As with most life insurance plans, you will need to complete an application form, and acceptance is based on your age, health and medical history and perhaps your parent’s medical history.
Group insurance is often less expensive than individual contracts and so many swear by this as the best way to insure their lives. However, there are some important factors to weigh before deciding that this is the right path for you.
Firstly, yes Group Insurance often has lower premiums than individual contracts. Lower marketing and sales costs allow an insurance company to pass along lower overhead expenses to a group in the form of lower premiums. Cost is always an important factor when purchasing insurance, but always be aware of what you are purchasing: read the policy terms and conditions.
Group plans are guided by a Master Policy, and the terms within this Master Policy can be changed by the insurer, the group administrator, or both. As a member insured under the policy you do not have to be consulted or approve of changes to the Master Policy. These changes could affect the premium, the coverage, claim exceptions and any number of other terms found in the contract.
Group plans also hold some risk for insured members since the association or employer could decide to change the insurance provider. If, for any reason, you are uninsurable due to a change in your health, you may not be covered by the new insurer. In this case it might be very difficult to find similar coverage at a reasonable rate because of your condition, and this could result in a life that is not covered by life insurance.
Another case where you may find yourself uninsured is if you leave the employer or association. Membership is typically required to maintain your insured status within the plan, so if you part ways with your employer or association you will need to find replacement coverage elsewhere. If your health has changed substantially you may find yourself in a riskier category and therefore you may not be able to find an insurance company willing to accept your application. It is also possible that insurance is offered but at a much higher cost than your previous group coverage rates.
With group coverage there is usually no guarantee of renewability and no guarantee of future premiums.
And finally, with group plans there may be a limit to the amount of life insurance offered – usually limited to some multiple of your salary. This may not be sufficient coverage, depending on your situation.
So before relying on group insurance to cover all of your life insurance needs, consider the pros and cons. It may be best to combine a group plan with individual coverage outside the group plan. It may be best to walk away from the group plan altogether or just use it as ‘top up’ coverage.
Remember, the amount of life insurance you need is dependent on many factors, and no two people are alike. Calculations to determine the appropriate face value of insurance should include your net worth, debt load, tax burden expected upon death, number of financial dependents and their ages, and how liquid your estate is. It also depends on what your spouse’s plans are upon your passing.