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 with employer-sponsored life insurance that you may not be willing to take. Before buying group life insurance from your employer, shop for a more flexible term life policy here with our free quote comparison tool below.

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Tim is a licensed life insurance agent with 23 years of experience helping people protect their families and businesses with term life insurance. He writes and creates stuff for QuickQuote and other insurance and financial websites.

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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

UPDATED: Mar 30, 2021

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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 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.

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.

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 insurance company.

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 guaranteed issue. 

Term Life: 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 Americans believes he/she needs more life insurance. If your only form of life insurance protection is through your company’s policy, individual term life insurance might be just the thing you need to protect your loved ones financially and give yourself peace of mind.

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 guidance.

Why Your Group Life Insurance From Work Isn’t 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. The company owns the policy, and all of the participants in the group receive certificates of coverage. These certificates are not actual life insurance policies, though. With group coverage, there’s only one policy. 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 are often very expensive. The reason is group life insurance pricing is based on experience rating. Instead of using your personal health history and lifestyle, the company combines all employees together and sets rates based on the risk of the group as a whole. See guidelines here: life insurance underwriting guidelines.

So, while you may be the picture of good health in your office, donut boy in sales and the pack-a-day lady in accounting are not. Unfortunately, you’re subsidizing their poor health.

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 which 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. But there may be restrictions and limits to the coverage that negatively affect you later, such as:

  • 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 more, you’ll usually have to go outside the company’s policy.
  • Restrictions on benefits – Many group life policies do not include additional benefits such as accelerated death benefit, disability waiver or child term riders.
  • 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 with no life insurance.

If your only form of life insurance protection is through your company’s policy, you’re not alone. Four of every ten married couples who have life insurance only have group coverage, according to LIFE But it’s absolutely, without a doubt, better than having no coverage at all.

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 something else, like a personal term life policy. Compare costs and see which option saves you the most money and provides peace of mind.

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