Do you need more than employer-provided insurance? (Comparisons & More)

A life insurance policy is one of the most important decisions you can make for your family. If they depend on you financially, your unexpected death could leave them in ruins.

Life insurance can protect them against that outcome by leaving them money to cover your funeral costs, pay off your outstanding debts, and set aside money for future expenses.

People usually buy life insurance policies in one of two ways: directly at retail or as an employee benefit through work.

Coverage that you buy directly from the insurer is known as an individual policy. Employer-sponsored life insurance plans are known as group plans.

This extensive review will give you a complete overview of group life insurance to help you decide whether to opt into your company’s plan. Read on for important information on policy types, costs, benefits, and drawbacks.

Curious how your group plan compares to an individual policy? Start comparing life insurance rates now by using our FREE quote tool above.

Top Providers of Life Insurance

The cost of group life insurance varies greatly depending on your employer and its agreement with the life insurer. For that reason, group insurers don’t often give quotes or publish sample rates.

Sample Rates

However, to give you an idea of how much a life insurance policy will cost you, here’s a breakdown of the combined average premium of the top 10 insurers by market share for a 10-year, $100,000 term policy for key demographics.

Aetna Average Life Insurance Rates – Male vs Female

If you’re shopping for a policy with a higher face value, here are some average monthly sample rates for the same insurers. These rates assume that the individual is a healthy, non-smoker.

Average Monthly Life Insurance Rates by Age, Gender, and Policy Amounts for Non-Smokers

The following are the average smoking rates for the same policies.

Average Monthly Life Insurance Rates by Age, Gender, and Policy Amounts for Smokers

Your price could be significantly less than these depending on how much of the bill your employer covers. They could also be more if your employer has an agreement with one of the more expensive insurers.

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What is group life insurance?

Much like medical insurance, many employers also offer life insurance coverage as a part of their overall benefits package.

The employer purchases a single contract that covers a large group of people (the employees), hence the name group insurance. When you elect coverage, you’re entering that pool of insured people.

The employer is the policy owner, not the employee. Employees who opt-in typically receive a certificate of insurance rather than the actual policy contract like they would if they bought their own policy directly.

Group life insurance tends to be far less expensive than individual insurance because the employer pays most (or all) of the bill.

Watch the below video for a brief comparison between group and individual life insurance.

https://youtu.be/o0rujZKC6Yg

A majority of group policies are term policies, but some insurers do offer group whole coverage.

How Group Life Works

Because you purchase group life insurance through your employer rather than directly from the insurer, there are different requirements and limitations than there would be with an individual policy.

Eligibility:

There may be a probationary period before you can enroll in a group life insurance plan. Whatever eligibility requirements your employer has for their other benefits likely applies to their group insurance, as well.

For example, an employer might require you to work full time for six to 12 months before qualifying for benefits such as paid vacation time, medical insurance, dental insurance, or life insurance.

While you can buy an individual life insurance policy whenever you want, you might not be able to immediately purchase group coverage.

Face Values:

Death benefits for group insurance are often much lower than an individual term life policy. Many face values max out at $25,000–$50,000. Sometimes, your total coverage is limited to one to two times your annual salary.

If your employer pays the full cost of your premium, you can expect a lower maximum face value.

Other plans allow you to pay for additional coverage on top of what’s provided for free by your employer. In that case, you can get a higher face value, but it’s still likely to be less than you could otherwise get on your own.

Taxes:

You don’t have to pay sales tax on the premiums used to purchase an individual life insurance policy. However, the premiums on a group policy could be taxable.

When a person’s employer provides life insurance as part of an overall compensation plan, the IRS considers it income, which means the employee is subject to taxes.

This only applies to coverage over the IRS limit of $50,000. The premiums on any policy less than $50,000 aren’t taxable. If you have a higher face value than that, you’ll have to account for it come tax season.

For example, if a person has $100,000 in group coverage, the portion of premiums that pay for the extra $50,000 is taxable. If the premium is $100 per month, $50 per month counts as taxable income.

Who should enroll in group life?

Today, the average household has around $200,000 in mortgage debt, $35,000 in student debt, and $6,000 in credit card debt. At the same time, funeral costs are rising year by year to the point that the average funeral today costs over $7,000.

Your loved ones could be on the hook for all those bills when you pass away.

According to the 2018 Insurance Barometer Study from Life Happens and LIMRA, 35 percent of households would be financially impacted within one month of the primary wage earner’s death.

Given those findings, it’s clear that most people need life insurance. Group insurance is a quick and easy way to get coverage.

Most everyone should take advantage, especially if it’s free. That said, group life insurance could be especially beneficial to people in the following situations.

Few financial obligations:

Because of the low face values, group life might not be best for people with large debts that would need to be paid upon their passing. However, if you don’t have some of those larger obligations, a group policy would be perfect for paying off smaller, miscellaneous debts, as well as funeral costs.

Self-insured:

If your savings are enough to cover your debts and future financial obligations, it isn’t as necessary to pay regularly for a large life insurance policy that will do the same thing. In that case, a smaller, low-cost group policy can be used to pay final funeral expenses, leaving your savings untouched for those larger obligations.

On a budget:

A free or low-cost life insurance policy (even one with a low face value) is a good option for anyone who finds an individual policy too cost-prohibitive.

In need of supplemental coverage:

If you already have an individual policy but would like more coverage, a group policy is a good option. Increasing the face value of an individual policy could significantly raise the premiums.

If eligible, a group policy can provide the additional coverage you need at little to no cost.

In poor health:

Group life insurance is pre-purchased by the employer. Because of that, coverage is often guaranteed with no medical exam. In that case, the only time you would need to take an exam is if you opted for additional coverage outside of what’s provided by the employer.

If you don’t qualify for an individual life insurance policy because of health problems (or any other reason), group plans are a great opportunity to get some coverage, even if the face value is low.

Plus, if the policy is portable, you can convert it to an individual policy of the same amount with no medical exam once employment ends.

Again, the face value won’t be very high for the no-exam option, but it could be a good way to back yourself into a policy for as long as you need it, regardless of your employment status.

How much coverage do you need?

Life insurance is generally used to cover two types of obligations: immediate and future.

Immediate obligations are the things that need to be paid soon after your death. These include:

• Funeral costs
• Medical bills
• Mortgage balances
• Personal loans
• Credit card debt

Future obligations are all the expenses (either planned or unexpected) that you want to pay for after your death. They include:

• Income replacement
• Spouse’s retirement
• Children’s college tuition
• Emergency savings fund

You might not have a choice on your coverage amount, depending on your employer’s contract with the insurance company. As previously discussed, your coverage could be limited to a set amount, such as a percentage of your annual salary.

If you do have the option to add additional coverage, you’ll need to calculate an appropriate face value based on these immediate and future obligations.

Your coverage length is also pre-determined. You don’t pick a term like you would with an individual policy.

Your coverage lasts as long as your employment, and most policies renew annually, much like confirming your medical and dental coverage every year during the open enrollment period.

However, it would still be a good idea to figure out how long you need coverage to best protect your family’s finances.

You can use that knowledge to make employment decisions, as well as choose a term length if you leave your job and are given the option to convert your group policy to an individual one.

Here are some tips to help you determine face values and term lengths.

Face Value

As mentioned earlier, a life insurance policy needs to cover two types of obligations: immediate and future. Determining your immediate needs mostly involves adding up all your existing debt. Deciding on an amount for your future needs might take a little more thought.

If your family depends on your income, those obligations need to include how many years’ worth of your salary you want to leave your family, any future bills you want to cover, and a plan to cover any unforeseen expenses that may arise after you’re gone.

If you’re unsure about any of these things, a life insurance agent or financial planner can help you determine exactly how much coverage you’ll need. In the meantime, there are simple formulas you can use to give yourself a good estimate.

One popular method used by many online insurance calculators is the DIME method. DIME is an acronym which stands for the following:

• D – Debt
• I – Income
• M – Mortgage
• E – Education

Adding up your total obligations in each category should give you the minimum face value you need.

Watch the below video for a quick look at how life insurance benefits can protect your family against debt.

https://youtu.be/MZ1dUdO_-rE

Here is a simple example using the DIME method.

A wife and mother of two children is an equal wage earner in her family. She has an annual salary of $75,000. The family has a remaining mortgage balance of $100,000, a $10,000 left on a car loan, and $5,000 in credit card debt.

The mortgage is the largest annual expense. Once it’s paid, the husband will have less need for her income. Therefore, she plans to leave five years’ worth of her salary as an emergency savings fund to cover any unforeseen expenses.

She also wants to leave both children $35,000 each for college tuition.

After factoring in an average funeral cost of around $7,500, her insurance needs are as follows:

• Debt – $10,000 car loan + $5,000 credit card + $7,500 funeral costs = $22,500
• Income – $375,000
• Mortgage – $100,000
• Education – $70,000
• Total need – $567,500

That total means she should buy a life insurance coverage totaling around $600,000.

Length of Coverage

Your life insurance term should cover the entire duration of your outstanding financial debt.

For example, if it will take 10 years to reach your retirement savings goals, you need at least a 10-year policy. If you have 15 years left on a 30-year mortgage, you need a 15-year term.

The easiest thing to do is pick your longest financial obligation and choose a term length to match, along with a face value to cover it and all the shorter obligations within that period.

In the example above, that would mean choosing a 15-year term since the mortgage debt will outlast the savings timeline.

Types of Group Life

Life insurance policies fall into one of two general categories: term or whole.

Term insurance provides temporary coverage for a set period while whole insurance provides permanent coverage for as long as you live.

Most group insurance is term insurance, so the choice of which to pick is usually already made for you. However, if you do have the option between term and whole, you’ll need to decide which is best suited to meet your financial needs.

To help, we’ve compiled a brief overview of each.

Term

Term life insurance provides coverage for a specified period, usually between 10 and 30 years. Once that period expires, the insurer cancels the coverage unless you choose to renew or convert the policy.

Term policies are generally meant to cover final expenses and outstanding debts in the event of an unexpected death.

Watch the below video for a quick overview of term life insurance.

https://youtu.be/hR2MaPaMgdU

Term insurance is the type of policy that represents less of a risk to the insurer. There is always a chance that you’ll outlive your term and they won’t have to pay.

When it comes to life insurance, a higher risk always means higher premiums.

Because term policies are lower risk, they’ll always cost less than a whole policy with the same face value. Most group policies are simple, level term policies. However, it’s still helpful to know the differences between all the term life variations on the market.

Level

A level term policy is the simplest form of term insurance. The premiums never increase, and the amount of the death benefit remains the same throughout the entire term.

Term policies are typically sold in terms of five to 30 years, in five-year increments.

Increasing

For an increasing term policy, the death benefit increases each year you have the policy at an established rate, usually between 2–10 percent. As the death benefit goes up, so will your premium.

For example, a $100,000 increasing term policy might increase by 10 percent every year. So, in year two, the death benefit would be $110,000. In year two, it would be $121,000, and so on.

An increasing term policy might not be the best option for those who want long-term coverage.

For example, on a lengthy 30-year policy, the death benefit will have grown significantly after a few decades. That means that the premiums will have risen along with it.

At some point, those higher premiums will reduce the overall value of the policy. The premiums could even increase at a higher rate once the benefit crosses a certain threshold.

Decreasing

Decreasing term insurance is sometimes called mortgage protection insurance. The benefit decreases every year of the term.

Many people buy term insurance to protect their families against large debts such as a mortgage. Theoretically, you should be paying that bill down regularly during your term. If you are, the overall amount of debt you need to be protected against gradually decreases every year.

With a decreasing term policy, your face value shrinks along with your debt obligation.

The premiums don’t decrease with the benefit. Instead, decreasing policies offer a lower premium from the start that stays level throughout the term.

Renewable

Renewable term policies let you renew your policy for an additional term after the expiration date with no new medical exam. Some require you to renew for the original term length, while others let you pick a new term.

Some renewable policies automatically renew every year up to a specific age (typically 65). Policies that renew annually usually have an increase in premiums each year as well.

Other policies automatically renew for your original length once your policy term ends.

Convertible

A convertible term policy allows you to convert your term policy into a permanent policy at any time, usually without taking a new medical exam.

Converting from term to whole insurance will increase your premiums. Some insurers also place age limits on conversions. Typically, you must convert before age 65.

Whole

Whole life insurance provides coverage for as long as you live. While term insurance is temporary, whole insurance is permanent.

As long as your whole life premiums are paid up, the insurer will pay a guaranteed benefit, regardless of when you die.

Most whole policies also include a savings account that builds a cash value either at a fixed interest rate or through investments similar to an IRA or 401(k). Many allow you to take out loans against the cash value.

Watch the below video for a quick overview of whole life insurance.

https://youtu.be/WuLl7CnVkig

If your employer offers a whole life insurance option, it’s likely to be a traditional whole policy. But again, it’s good to know the differences between all the options available.

If one of the many whole life variations is a better option for your family, you might want to consider purchasing an individual policy and using your employer-sponsored policy as supplemental coverage.

Whole life comes in the following variations.

Traditional Whole

A traditional whole life policy (sometimes called ordinary life) is the most common form of permanent insurance. It’s also one of the simplest.

Your cash account operates similar to a traditional savings account. A portion of your premiums is placed in an account that grows at a fixed interest rate (typically around 3–8 percent).

Traditional whole is the least risky option.

You’re always guaranteed to see positive growth in your cash value. It doesn’t depend on any market factor that could experience a downturn (as will be explained shortly).

The main drawback is that it’s the least flexible whole life option. You often can’t change your death benefit or adjust your premium payments.

Universal

Universal policies offer the flexibility to set monthly premiums, change coverage amounts, and make lump-sum payments to keep premiums low while maximizing cash value.

That cash value on a universal policy grows at a fixed rate, similar to a traditional whole policy.

These policies offer more flexibility than the traditional option, but less than the following policy types, particularly when it comes to how you invest your premiums.

Indexed Universal

Indexed universal life policies offer all the flexibility of a universal policy, with the additional benefit of choosing how you invest your premiums.

Indexed universal plans let you allocate your cash to an equity index account such as the S&P 500 or the Nasdaq 100, rather than growing at a rate set by the insurer.

They are riskier in that growth isn’t guaranteed, but they do come with the potential for higher returns than a traditional whole or universal policy.

Many also have the option to take a break from the index and temporarily invest in the same stable, fixed-interest account as the traditional whole or universal policy.

Guaranteed Universal

Guaranteed universal life policies are one step between a term policy and a traditional whole policy. They offer fixed premiums and guaranteed no-lapse coverage.

Guaranteed universal policies don’t accumulate a cash value like most whole policies.

They are more like term policies that never expire as long as you pay your premiums. If you want to use your policy as an investment, that could be a major drawback for you.

Variable

Variable policies invest your cash value in stocks, bonds, and money market mutual funds similar to an IRA or 401(k), rather than in a fixed-interest or indexed account.

Variable policies come with the greatest risk, but also the highest growth potential.

Depending on how the stock market performs, you could lose some of your cash value and possibly see your face value decrease because of it. Fortunately, most policies come with a minimum death benefit guarantee.

Variable Universal

Variable universal policies combine the benefits of a universal and variable policy. They have the adjustable premiums and face values of a universal policy, along with the potential investment options of a variable policy.

That also means they come with the same risks as a variable policy.

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Average Cost of Group Life

Group plans are often less expensive than individual plans because the employer covers a portion of the costs. Because of that, an insurer’s rates vary from person to person based on their employer and their particular benefits package.

Despite that variation, insurers still base their premiums on some industry-standard measures.

Factors That Affect Rates

There is no industry-standard price for life insurance. Rates vary from company to company and from person to person.

Insurers start with a base premium and then raise it based on risk. Some of the primary factors in determining risk are as follows.

• Age – Age is a critical factor in determining insurability. The older you are, the closer you are to death. Therefore, the longer you wait to buy a policy, the higher your rate will be.
• Gender – Statistically, women live longer than men. Because of that, they usually pay lower premiums.
• Health history – The healthier you are, the longer you’re likely to live. Longer life expectancy translates to lower premiums. To determine your overall health, insurers may require a complete medical exam.
• Family medical history – Many diseases are hereditary, so most insurers will also inquire about the health history of your immediate family during your application.
• Occupation – Some jobs come with a higher risk of accidental death than others. The more dangerous the profession, the more likely an insurer is to pay out an early death benefit, which means higher premiums.
• High-risk habits – Regular, high-risk habits such as flying, racing, or mountain climbing could result in increased premiums.
• Tobacco use – The most common high-risk habit that insurers look for is tobacco use. Smokers pay higher rates than non-smokers in every demographic.

Once the insurer determines your rate based on these risk factors, it’s typically fixed, meaning that it won’t change for any reason over the life of the policy.

Medical Exams

When applying for a group life policy, insurers will require you to fill out a health questionnaire and may request your medical records.

Watch the below video for some tips on taking the medical exam.

https://youtu.be/4wOqIX_zQsY

Because the face values are low, and because the plans are subsidized by the employer, many won’t require a full medical exam like they might with an individual policy.

However, if they do, the basic life insurance medical exam process looks like this:

• The employee fills out a life insurance application and a medical questionnaire.
• The insurer schedules an in-home medical exam.
• The medical examiner conducts a brief interview.
• The examiner measures height, weight, and vitals, then takes a urine sample, blood sample, and oral swab.
• Lab results are sent to the insurer for review.
• The insurer assigns a risk classification and notifies the applicant of final approval and premiums.

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How to Know If You Have the Best Provider

You don’t have a choice in which company your employer chooses for their group life insurance coverage. However, there are steps you can take to make sure that the company they’ve chosen is a good one and worth your time and money.

First, you should make sure the company is reliable. Start by researching the insurer’s market share.

If they have a significant presence in the industry, with a lot of policies in force, then they’re more likely to be an established, respectable company.

If you haven’t heard of them and you can’t find their name on any notable lists, you might want to look elsewhere.

Any of the top-ranking companies would be a good place to start.

Top 20 Life Insurers by Market Share

From there, read reviews of the company that focus on policy offerings, financial stability, and reputation. You can also do your own research in those areas by using the following resources.

• Third-party rating agencies such as A.M. Best, the Moody’s Investors Service, and Standard & Poor’s (S&P) measure an insurer’s financial strength and its ability to pay all its policy obligations.
• J.D. Power’s annual U.S. Life Insurance Study measures overall customer satisfaction in four areas: annual statement and billing, customer interaction, policy offerings, and price.
• The Better Business Bureau uses factors such as time in business, open complaints, resolved complaints, and legal action against a company to assign one of 13 letter ratings, A+ through F.
• The National Association of Insurance Commissioners Complaint Index compiles the number of complaints filed against an insurer each year and compares it to that of other companies.

If you don’t like what you see, you can use the same criteria and resources to find your own individual policy elsewhere.

Do rates change over time?

Your premiums can increase annually depending on your employer’s contract with the insurer. The most common type of group life insurance is a level term policy, which has guaranteed rates that remain the same for the life of the policy.

Other group policies renew every year during your company’s open enrollment period. Life insurance policies that renew annually typically do so at a higher premium.

As previously discussed, life insurance rates go up with age. Renewing a policy is essentially starting over again and applying for a new term once your previous term expires (though your acceptance is already guaranteed).

Every time you renew, you’re a year older than you were for your previous policy. Your rates go up accordingly.

You could also see your rates go up if you leave your employer and opt to take your policy with you, which will be discussed later in this guide.

Changing Your Policy

It’s possible that a significant life change during your tenure with an employer could necessitate a change to your life insurance coverage.

For example, you could buy a new house or have a new child, both of which might prompt you to increase your face value from the amount you chose when you first elected coverage.

Unfortunately, group policies are far less flexible than individual policies.

Some don’t allow you to increase or decrease face values at all, while others only let you do it during open enrollment periods, similar to making changes to your company health insurance plan.

Typical changes, such as converting or renewing a policy, can usually only be made after employment ends.

Continuing Coverage After Your Employment Ends

Because your employer owns the group life insurance policy, your coverage is tethered to your job. If you quit or are let go, your coverage under that specific policy ends.

Fortunately, you do have some options if you want to continue your protection after your employment ends.

Portability

Some group policies are portable, meaning you can take them with you when you leave. This is usually done in one of two ways.

• Your plan is converted from a group plan to an individual plan. Your premiums rise from the group rates, but your acceptance is guaranteed without the need for a medical exam.
• Your plan will continue at the lower group rates provided by your employer but will increase with age, usually in increments of 5 years.

Policies are often not portable if you’re leaving your job for active-duty military service.

Conversion

Some group policies can be converted from group term life to individual whole life. The premiums will be significantly higher than a portable plan that is converted from group term to individual term since whole life insurance is always more expensive than term life insurance.

Some insurers won’t terminate coverage if you enter active duty military service after conversion, though some may still have wartime exclusions.

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Pro & Cons

Group life comes with benefits and drawbacks. Here are some of the biggest to consider.

Group Life Insurance Pros & Cons

None of these cons should stop you from enrolling in your company’s group life plan, but they should caution you against making a group policy your primary form of life insurance.

The Bottom Line

Group life insurance is a great benefit and should be taken advantage of (especially if offered at no cost by your employer), but it shouldn’t be your primary form of life insurance.

Group policies tend to have low face values. They likely won’t offer you the coverage you need to ensure the financial security of your family. If you have large debts such as a mortgage, a group policy could fall very short of your obligations.

Plus, you don’t have as much control over a group policy since your employer is the true owner. At any time, your employer can end their contract with the insurer and discontinue the benefit for you.

Group policies are at their best when they are used as a low-cost supplement to a larger, more stable, and more flexible individual policy.

If your employer offers group life insurance, our hope is that this guide explained the benefits of opting into the plan, while also highlighting the usefulness of separate, personal coverage.

Still have questions? Be sure to check out our many in-depth guides to coverage types, policy options, and the life insurance process in general.

If you just now realized the importance of owning an individual policy, those same guides can help you find the best policy, from the best insurer, at the lowest price.

Start comparing life insurance rates for an individual policy now by using our FREE quote tool below.

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