Why employer life insurance is not what it seems.
So you’re fortunate enough to get life insurance through work. Awesome. But have you ever looked into what that actually entails? Like really looked into it? Yes, it’s a convenient, straightforward, and inexpensive option for financial protection. But employer life insurance (while well-intentioned) is usually a minefield for misinterpretation. Especially for those who opt in to this benefit without looking into the details. When it comes to the future financial security of your loved ones, you don’t want a cheap perk to lull you into a false sense of security. So get yourself clued up on some common myths around group life insurance and learn what’s really going on.
- What is group life insurance?
- Myth 1: Everything is covered
- Myth 2: You have full control
- Myth 3: You’re covered forever
- Myth 4: It’s flexible, and you can take it with you
- Myth 5: It’s the cheapest option out there
- The bottom line
What is group life insurance?
This is a basic life insurance policy that an employer offers to their employees as part of their benefits package. How it works is that your company bundles everyone into a group—hence, why it’s also called group life insurance. Since you’re essentially lumped in with your co-workers, your rates are usually cheaper as they’re negotiated on behalf of a wider crew of people. You often have a base amount covered, with the option to add more in coverage if you need it. However, on the flip side, there’s less flexibility and personalization than having an individualized policy. And there’s also usually no real relationship between you and the insurer since your employer is the middle man. Overall, group life insurance policies, although a pretty-decent start to life insurance, can sometimes fall short when it comes to providing the level of protection your family needs. And while each case is unique, it’s always best to base your decisions on facts vs. misguided confidence.
Myth 1: Everything is covered
There’s really no reason to not take advantage of any free or inexpensive insurance that you can get through your employer. Because when it comes down to it, group life insurance is a great starting point. But, you have to consider if the amount you’re covered for will be enough for your family’s future needs (e.g. will it cover your mortgage, college tuition for your kid(s), retirement for your spouse etc.). A common misconception is that there are no coverage limits. But, there usually are. Often the amount you’re covered for has a lot to do with your income (and is based on some formula where your income is multiplied by x amount). Also, salary and life insurance are usually linked and many jobs only offer one to three year’s salary as their coverage amount. Would that be enough to guarantee your family would be taken care of if you were no longer around? Probably not. So you might need to apply for additional coverage by either opting into any supplemental option provided by your employer or seeking out a separate policy altogether. To avoid any surprises, start by looking at your policy details and confirming your coverage limit. If you’re looking for something in the $500,000 range but your plan only offers $100,000 in coverage, there’s clearly a gap.
Myth 2: You have full control
Life insurance through work is hard to beat for convenience. From researching options to negotiating prices to all the nitty gritty details in between—the hard part has already been done by your employer. But, that comes at the cost of not having much say over your policy. Not only does your employer get to choose the company that provides the insurance but they can also just stop providing you with insurance altogether. Yes, they are well within their right to choose a provider that’s not quite right for you (but offers cheap rates). Your employer can also reduce your benefits and even drop your policy altogether—it’s just the name of the game when you have a middle man. If this is something that concerns you, check out the AM Best rating of whichever company is behind the policy your employer offers. That way, you can look into their financial stability and creditworthiness, and also dig up any potentially important details that might affect their ability to pay claims promptly.
Myth 3: You’re covered forever
Of all the benefits you get through work, life insurance is probably one that most people take for granted. And why not—the process is usually so simple that it’s easy to file it away in the “things i don’t have to think about just yet” part of your brain. But, If 2020 has taught us anything, it’s that there are no guarantees. Especially when it comes to jobs and employment opportunities. Unfortunately, if you lose your job, you’d have a gap in coverage until you find a new one. That’s no good. Losing your job shouldn’t mean risking your financial wellness or putting your family at risk. In fact, it’s more important than ever to be covered in such situations. Your coverage might also change if you move from a full-time position to a part-time one within the same company—that’s not something most people consider. This is why it’s crucial that you read the small print on your group life insurance policy. That way, if you see that there’s potential for a lapse in coverage due to unforeseen circumstances, you can start looking into other options.
Myth 4: It’s flexible, and you can take it with you
In an ideal world, employer life insurance would be something you sign up for once and take with you wherever you go. But, what If a new job opportunity presented itself and you left your current employer? Do you know what would happen to your policy then? Your employer could be totally cool and just let you keep it at no cost or little cost. But, It could also go a number of other ways. For one, your coverage might get terminated altogether. That means you’ll need to find another option either through your new employer or a separate company. Remember, the clock resets here so your rates will once again be determined by your age, and also your health status. So you could be in for a higher rate, especially if you now have new health conditions that might make it difficult to find an affordable life insurance policy. But, what if your policy wasn’t terminated and you had the option of transferring it over to a new employer? Well, there might be a fee to transfer. And once again, you’d have a gap in coverage from the time you leave your job to the time you get a new policy going. Not ideal. So take a moment, once again, and look at that small print. Or, better yet, contact your provider. Just find out if your policy would be canceled if you leave your job. If so, make a note to line up a new one. Also, see if there are any additional charges associated with transferring your policy.
Myth 5: It’s the cheapest option out there
Since life insurance through work is usually free or very cheap, It’s easy to see why most people think it’s the most affordable life insurance option out there. But, that’s not always the case. Understanding your job’s life insurance is important—from coverage amounts to supplemental options. What’s awesome is that group rates are negotiated with a wider pool of people in mind, allowing for more cost-effective premiums. But, that doesn’t mean that employer life insurance is always the best deal available. If you’ve got even one person dependent on your income (e.g. a spouse, parents, or kids), you may need to get a supplemental policy. And honestly, if your health is good and you’re on the younger side, buying a policy privately might be less expensive than buying supplemental coverage through the group plan at work. With that said, you might want to consider a group plan if you’re a little older or have any preexisting health conditions. Employer-provider plans usually don’t require a medical exam so you’re often guaranteed some level of coverage. Don’t quote us on that, though—do your own research and see what you find.
The bottom line
Life insurance through work is generally an inexpensive and nice perk—so take advantage of it. But don’t stop there. If you’re at all concerned about covering current or future responsibilities like a mortgage or college tuition, you’ll likely need more than the basic financial protection that you can get with your employer’s offering. Same with if you have any significant debt or people relying on your income. So start looking into it. If you find you need additional life insurance, you may be better off shopping around and checking out some quotes from private insurers too. That way, you’ll know if your employer is offering the best deal.