Tuesday, October 20, 2015

8 Problems with Group Term Life Insurance

Group term life insurance is one of the most common employee benefits. It's a benefit that every employee should definitely enroll in. The reason is because it can be one of the most important benefits their family would receive if they die while they have it.

However, there are some common problems with group life insurance coverage that most employees flat out don't discover until they are much older and by then, it's too late to do anything about it. This article covers some of the most common problems with group life insurance.

As a quick refresher, there are two types of group term life insurance that most employers make available to their employees. Those two options are:

  1. Basic group term life insurance Basic group term life insurance is usually an amount of life insurance an employer provides for free to employees. It's often a flat amount somewhere between $10,000 and $50,000 but can be a different amount like one times an employee's salary.
  2. Supplemental group term life insurance Supplemental group term life insurance is an optional life insurance program where employees can elect to buy additional coverage at their own expense. Similar to basic group life, extra life insurance might be flat amounts that range from $5,000 to $500,000 or in some cases it could be a multiple of their salary - like 2 or 3 times their annual salary.

Both basic group life and supplemental group life are two options that are great for employees. But as good as good as these options are, many employees (and some employers) don't quite understand the limitations of their group life plan. So, here's a list of some of the most common problems that employees discover about how their group life plan works - sometimes years after they've initially enrolled.

  • PROBLEM #1: Employees don't own the life insurance Group life is issued under a group certificate. Employees do not get policies that they own and control. If the employer decides to change or cancel the group life coverage for any reason, the employee really has no choice in the matter. I've personally witness employer groups decide to eliminate their group term and those employees insured in it ended up losing the group life insurance - coverage that they took for granted would always be there.
  • PROBLEM #2: Supplemental group term life rates usually increase every five years While there is issue age voluntary group term life that doesn't increase in premium, the vast majority of group life premium increases as you attain older ages in five year rate bands. This isn't bad when you are in your 20's and 30's, but once employees get up in their 50's and 60's, they start to feel the sting of higher premiums. Sometimes, they will exit the plan because it gets too expensive. The reason the rates go up is to price people out of the plan in the first place - and it works eventually - if employees work long enough. And then guess what, the insurance company is off the hook and no longer has to pay.
  • PROBLEM #3: Face amounts reduce at ages 65 and older While employed, an employee's group life insurance face amount usually begins to decrease when they reach certain ages like age 65 or age 70. Depending on the plan, it's likely an employee who thought they had one amount of life insurance may learn later they had much, much less because of the age reduction in life insurance.
  • PROBLEM #4: Limited or no coverage for family members Group life insurance options may only provide limited coverage for the employee's spouse and children. It's entirely possible they may not even cover family members at all. For employees that are taking care of grandchildren and want to cover them, group life, rarely, if ever, covers them.
  • PROBLEM #5: Group life terminates when an employee leaves or retires When an employee leaves employment, their coverage ends. Far and away, most group life expires worthless because most employees die after they leave employment not during and by then the coverage has already expired - worthless.
  • PROBLEM #6: Expensive or no conversion options Employees who leave employment can sometimes convert their term life insurance to a type of permanent life insurance policy within the first month after they leave an employer. But few employees do because they are older by the time they get the option and are not always the healthiest. Insurance companies know that only the sickest employees convert their group life insurance and therefore make it extremely expensive. It's also possible that employees just will not have a conversion option in the first place. In that case, coverage just expires - again worthless.
  • PROBLEM #7: Portability doesn’t mean coverage lasts for life It’s more common now to allow employees to “port” their voluntary group term, but portability doesn’t mean coverage lasts for life. It just means that the employees can stay in a version of the group plan until a certain age. It still will expire at some age and most likely will increase in price as the employee gets older. It’s important to realize that porting coverage after leaving employment doesn’t guarantee a death benefit. There’s a big difference between converting a group term policy into an individual policy and just keeping insurance under a group certificate. Under the group certificate, there's a pretty good chance, the employee will still outlive it.
  • PROBLEM #8: Employees rely too heavily on group life coverage Some employee’s will never talk to a life insurance agent. Because of that, what happens is that the only life insurance many employees have is group insurance. They are often surprised to find out it expires when they are going to need it most.

Because employees will most likely live past retirement age, the problems listed above with group life plans really revolve around one bigger problem. That problem is that group life really isn't designed to pay when an employee needs it. Sure, if an employee dies when they are working, it will definitely pay. But most people come to find out that they will outlive it.

The solution to these problems is to also offer some permanent life insurance options to employees. For those employees that know the difference between term and whole life insurance and that want permanent coverage that deals with the problems listed above, you've given them an option where they can opt to take care of it.

If you have any questions, feel free to list them below in the comments and I'll try and help you out.

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Michael is a champion of guaranteed issue for employees in the workplace. He's been an insurance agent since 1992 and has worked with thousands of employees.