The Problem with Employer-Provided Life Insurance

The problem with employer-provided life insurance or group life insurance policies is that you cannot take them with you when you quit or retire. Your needs may also exceed the coverage limits of the group policy, which is a risk that you may not be willing to take.

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Ashley Dannelly has a Master of Arts in English and teaches English at Columbia International University and other higher education institutions. She is also a certified personal trainer with the American Council on Exercise and trains clients in both individual and group settings. Ashley’s background in English and fitness has allowed her the opportunity to write and create content for many ...

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Written by Ashley Dannelly
Certified Personal Trainer Ashley Dannelly

Benjamin Carr was a licensed insurance agent in Georgia and has two years' experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.

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Reviewed by Benji Carr
Former Licensed Life Insurance Agent Benji Carr

UPDATED: Apr 20, 2022

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If you’re fortunate enough to work for a company that offers employee benefits, life insurance through a group policy might be among the perks you can take advantage of. Group life insurance policies generally offer a decent amount of coverage at a reasonable price and some give the option of adding a certain level of additional (supplemental) coverage.

Sounds great, right? Now you can check getting life insurance off of your “to-do” list.

Or not.

While group life insurance through your employer (or employer-provided life insurance) is far better than no life insurance at all, it may not be enough to protect your family from financial hardship if the unthinkable were to happen to you.

What are the downsides to many group insurance policies?

  • Coverage Limits—Some policies may set a limit on the amount of coverage you can get. Often, the coverage you’re eligible for will be based on some multiple of your income. To obtain more coverage, you may have to apply for an additional policy from another source.
  • Less Flexibility in Benefit Options—Group life insurance doesn’t typically provide the option of adding benefit riders (see our glossary to better understand important life insurance terminology) like those for accelerated death, child term, or disability.
  • Lack of Control Over Your Policy—With the policy owned by your employer, not by you, you could find yourself with no life insurance if your boss reduces the benefits or entirely drops the group policy.

And there’s more.

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What is the biggest problem with employer-provided life insurance?

Now you Have it, Now you Don’t — A group policy typically disappears if you’re laid off or if you voluntarily leave the company. So, if that’s your only source of life insurance, you’re banking on the idealistic vision that you’ll be working for your employer for a long time. Unfortunately, real-world data shows that’s not very likely. According to the U.S. Bureau of Labor Statistics, the median number of years that wage and salary workers had been with their current employer was 4.6 years in 2014.

While some group policies are portable, allowing you to take coverage with you by remaining a part of the group after you leave a company, with most you simply lose coverage. If you opt to continue coverage with the group policy, be warned—you might find yourself paying a rather hefty premium to the insurer.

Some group life policies offer the option to convert them to individual policies. These are also generally quite expensive, but they offer the advantage of being a guaranteed issue. 

What is term life insurance?

Is term coverage an affordable way to get more peace of mind?

According to LIFE, four out of every ten married couples have only group coverage; and one in four people in the United States believes they need more life insurance. If your only form of life insurance protection is through your company’s life insurance policy, individual term life insurance might be just the thing you need to protect your loved ones financially and give yourself peace of mind.

A term policy is a type of policy that offers life insurance coverage for a set period of time. Term lengths range from 10 to as much as 35 years from some life insurers. You can select a basic coverage package, or you curate more robust coverage with riders. Many life insurers offer riders, allowing you to create a life insurance plan that offers the exact protections you need.

You will have this life insurance protection throughout the entire coverage term as long as you continue to make your premium payments. Once the period of time, you selected ends, or at the end of your term, you will be able to either renew, convert, or cancel your term policy. Keep in mind, even if you paid every single premium, your life insurance protection expires at the end of your term.

Term life insurance offers coverage at premiums often significantly less than those for portable group and whole life policies. Best of all, they’re flexible in the amount of coverage you can apply for and the length of the time (the term) your policy will be in effect. Typical term periods are 10, 15, 20, 25, and 30 years. The term period locks in the policy cost for that specific time and your rates will not increase at any point during your coverage.

Luckily, it’s quick and easy to get a term life quote online. And if you need help determining how much coverage your family might need or have other questions about term life insurance, reach out to a trusted life insurance professional for help to create a life insurance plan. There are thousands of independent insurance agents that can help you compare life insurance products, determine what type of coverage you need, and go over the cost of insurance with you, so you can find the life insurance protection you need to take care of your family at a rate you can afford.

Why isn’t your group life insurance policy from work enough?

When I was in my late twenties, I worked for a large financial services company. It was a good job with significant benefits like medical insurance, matching 401k, vacation and the like. The company also provided a small group life insurance benefit maybe $20,000 — and offered supplemental life insurance if you wanted more.

I was married with our first child on the way, so I bought the extra life insurance. The total was about $200,000 if I remember correctly. The premiums were deducted from my paycheck, and I never gave it a second thought.

Until I decided to leave.

You (Most Likely) Can’t Take it With You.

That’s what the HR manager told me when I left. I was shocked, angry and terrified to learn my life insurance policy from work was no more. Fortunately, I was also young and healthy enough to get a new policy without much trouble. One I still have, by the way. My situation would have been different if I needed life insurance with a medical condition.

Most employer-sponsored life insurance benefits are from group policies. Group policies are life insurance products for businesses; so, the company owns the policy, and all of the participants in the group receive a certificate of coverage. These certificates are not actual life insurance policies, though. With this type of insurance, there’s only one policy instead of individual plans for each employee. Employees (or insureds) are allowed to come and go, but the group policy stays in place despite this migration.

This is a good setup for employers because it’s much easier and less expensive to administer this way. It’s also good for employees because it keeps prices low, provides guaranteed coverage and offers the convenience of payroll deductions. However, things get messy when it’s time to leave the group.

Many group policies are not portable. You can’t take the coverage with you when you leave your job, unlike the old group birthday cards and half-dead plants from your office. You simply lose the coverage.

Even if You Can Take it With You, it Will Cost You.

Some group policies are portable, meaning you get to keep your life insurance coverage in force. If you opt for this, you remain a part of the group policy, and you typically pay premiums directly to the life insurance company.

Portable group life insurance policies often have high life insurance premiums. The reason is that pricing for this type of life insurance protection is based on experience rating. Instead of using your personal health history and lifestyle, the insurer combines all employees together and sets rates based on the risk of the group as a single entity. See guidelines here: life insurance underwriting guidelines.

So, while you may be the picture of good health in your office, doughnut boy in sales and the pack-a-day lady in accounting are not. Unfortunately, these other people are considered high-risk to a life insurer, and they’re more likely to develop a medical condition or pass away while on their life insurance plan. Since the company is more likely to have to pay the death benefit on a person who is considered high-risk, their life insurance rates are higher.

This means that you are paying more for your life insurance coverage because your coworkers pose a greater risk to the life insurer. With your own life insurance coverage, your payments would only reflect your level of risk.

Some group life policies even offer a conversion option, which is a bit different from portability. This allows you to convert the policy to an individual policy that you own separate from the group policy. These are often quite expensive as well but are usually issued on a guaranteed basis.

It’s Cheap. It’s Easy. But it’s Just Not Enough.

Your group policy may provide enough coverage for you at a reasonable price. Many do. However, there may be restrictions and limits to the coverage that create roadblocks that you wouldn’t see with individual life insurance. Unfortunately, these things can negatively affect you later. Here are some of the problems you might run into:

  • Limits on coverage — Some policies limit the amount of coverage you can take out. This is because the guaranteed issue design of the policy (no one is declined). It’s often based on some multiple of your income. If you want additional coverage, you’ll usually have to go outside the company’s policy and purchase supplemental coverage. This means more premium payments for you.
  • Restrictions on benefits — Many group life policies do not include additional benefits such as accelerated death benefit, disability waiver, or child term riders. Many of the policies included in benefits packages only offer basic coverages. It’s very likely you could get better life insurance protection without your payments being much higher with individual coverage.
  • You have little control — If your employer reduces the benefits or drops the group policy entirely, you could be left with no life insurance.
  • Terminations or layoffs — Let’s face it, these things happen despite how strongly we believe in our relationship with our employer. It’s business and sometimes that means letting good people go, even if it leaves them without the employer-provided group life insurance.

If your only form of life insurance protection is through your company’s policy, you’re not alone. As you read above, 40% of married couples only have their group plan in place rather than having individual life insurance.

Take the time now to find out what options you have with your group coverage. You may find that it offers portability and conversion. If so, ask how much it would cost you to take it if you leave. Or you may realize you need an individual policy, like a term life insurance policy. Compare costs and see which option saves you the most money and provides peace of mind.

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