Are You Covered? Key Advantages and Disadvantages of Group Life Insurance

Question. My partner and I have been thinking about life insurance recently. We have a young child, and are considering a house soon for our growing family. A friend of ours told us it’s really important that we get some life insurance to protect ourselves. But I already have a group benefits plan with my employer, and it includes life and disability insurance. Am I already covered through my work plan? Do I need more?

Answer. Great question. Properly insuring yourself and your family is a very important decision that has potentially life-altering consequences. If you’re fortunate enough to have an employer-sponsored group benefits plan, that’s great. However, as many families have found out the hard way, those plans are often inadequate in terms of protection, and present other significant challenges as well. Let’s take a look at some basics of life insurance in general, and some key advantages and disadvantages of group life insurance in particular.

Life Insurance

The basic premise of life insurance is to offer protection in the event of death. In Canada, life insurance benefits are paid tax-free, regardless of the type of life insurance policy.

There are many valid reasons why someone may require life insurance. For young families in particular, two of the most common scenarios triggering the need for life insurance are the purchase of a house, or the birth of a child. In both of these cases, the death of one spouse would typically lead to very significant financial hardship for the surviving spouse and children. On the other hand, older folks often use life insurance as an estate planning tool. For example, as a means to protect against tax liabilities at death, or to leave an inheritance to loved ones or a favorite charity or organization.

Of course, not all life insurance is created equal, and there are some very important differences between an individually owned life insurance policy, and a group life insurance policy offered through your employer’s group benefits plan.

Key Advantages of Group Life Insurance

• Easy to obtain. For most group life insurance plans, the process is quite simple – fill out a few forms (mostly online these days), answer a few questions, and presto! You’re insured. Paramedical or other testing that is typically required for individual life insurance policies is not required for enrolment in group insurance plans.
• Cheap. Group life insurance can prove to be cheaper for some, but not for all. Therefore, price can also be somewhat of a disadvantage, as healthy individuals pay the same rates as those who are unhealthy and higher risk. If you’re relatively young and healthy, you could end up paying significantly more for a group plan than individual coverage. However, if you’re older and/or in less than perfect health, a group plan can often prove to be much cheaper than a personally-owned individual life insurance policy.
• Available to higher risk individuals. Perhaps the most important advantage of group insurance is that it provides coverage to those who would otherwise not be able to afford, or would not be able to qualify, for an individual insurance policy due to poor health or other medical concerns.

Key Disadvantages of Group Life Insurance

• Insufficient coverage. Most group life insurance plans offer a basic amount of coverage, typically 2 times your salary. For example, if you make $70,000, you may have a basic life insurance coverage of $140,000. Note that, while the “2 times salary” amount is common, it is not universal, and different plans may offer different amounts of coverage. For most people, this is insufficient. However, most group plans also allow the employee to pay additional premiums in order to increase the coverage up to a certain limit such as a maximum of 5 times salary. Again, for some people, this amount may be sufficient, but for many others, it is not.
• Not portable. A major disadvantage of group life insurance is that ceases to exist when you’re no longer a member of the group (i.e. when you leave the employer). This poses a very significant risk – If you switch jobs, you lose insurance. Your next employer may or may not offer a group life insurance plan. Granted, it is often possible to convert group life insurance to individual life insurance when leaving the plan, however the costs may be considerably higher.
• Not guaranteed. Group life insurance is not guaranteed, and in more ways than one. First of all, the premiums are not guaranteed – your insurance premiums can be increased at any time. Worse, the coverage could be cancelled altogether. Your employer can simply decide to cancel the coverage at any time, which would then leave you uninsured.

Bottom Line

In most cases, group life insurance, by itself, offers less coverage than what is required, and therefore leaves many individuals underinsured. Of course, group life insurance is better than no insurance at all. Yet, most people need additional coverage to compensate for any deficiencies in their company’s group life insurance plan. Conversely, a personally-owned individual life insurance plan can be tailored to meet your specific needs, thereby ensuring you and your family are properly protected.

So, how much insurance coverage do you need? And what type of insurance plan is the best way to protect yourself and your family? If you’d like to have a discussion with an insurance specialist, just ask us.