Many employers provide life insurance to their employees via a group plan. Face amounts under $50,000 are usually free to the employee, but the Internal Revenue Code requires employers to include in employee’s income the cost of coverage in excess of $50,000.
The benefits of group life insurance vary by the group, with larger groups providing a greater benefit. That is because once the group reaches a certain size, no underwriting is required. This is obviously a huge benefit to the less healthy members of the group who might have a difficult time procuring the coverage on their own.
Although group life is a great perquisite to have, it is not without flaws. First, it is not mandatory. Employers have and will continue to cancel group plans when it is no longer in their (economic) interest to continue them.
Just last week, Harris Corp. cancelled a group policy covering 9,800 current and former employees of a recently acquired subsidiary. To add salt to the wound, approximately 7,400 of the group are retirees. The age and health of the affected employees will probably make procuring replacement coverage difficult at best, impossible at worst.
A second problem with group insurance is that it is only available to employees (and sometimes to retirees) and hence they lose it when they leave the company. That isn’t a problem if they are going to a large employer with a similar group plan. But what if they’re going to a start-up? Or any employer that doesn’t have a group life plan? What if they’ve become uninsurable?
The good news is that the employee usually has a right to convert the group insurance without evidence of insurability to a whole life (or sometimes a universal life) plan upon separation from employment. The bad news is those plans are oftentimes not very competitive. For those who are uninsurable however, a non-competitive policy is better than no policy at all.
Given the limitations of group plans, it is best to treat them as supplemental plans, not primary plans. That usually isn’t a problem when the face amount is small, but when the face gets to be in the mid-six figure range, many people pass up the individual plan thinking they have an adequate amount. While the face amount may indeed be sufficient for the time being, given the nature of the product, it has the possibility of being quite ephemeral. Which is the last thing you want your life insurance to be.