A DBS associate recently reminded me that we are entering the time of year when many will be selecting their group benefits. This makes it the perfect time to review your clients’ group life options. In fact, there are many reasons why it may be beneficial for your client to purchase an individual life insurance policy either instead of or in addition to acquiring a group policy.
The Benefits & Limitations of Group Life Coverage
With employer-provided group life insurance, the employer determines the limits of the coverage that is provided by the master contract and offered to eligible employees. The employer may offer the coverage either at no cost as part of the employer’s fringe benefit package, or as an elective benefit at the negotiated group rate. Typically, some basic level of coverage is provided to all employees at no cost, other than the imputed costs for face amounts over $50,000. Optional additional coverage may be available, but where offered the employee must elect and pay for this coverage themselves.
If the coverage is provided to the employees at no cost, the employer determines the face amount and can change or discontinue the coverage at any time. Typically, the amount of coverage is a factor of compensation such as one or two times the salary. This form of group coverage typically ends at termination of employment. However, with some employer plans there may be short period of time following separation from employment where the individual can take over or convert some of the policy.
The rate charged by the insurance carrier is based on the make-up of the group and whether coverage is provided to all eligible employees. There is no underwriting involved when coverage is provided to all employees, so the health statuses of individual employees are not considered. For those employees with health issues, this can be a significant advantage. However, the group rates for healthy employees may be more expensive than individual coverage.
Individual Life Insurance Coverage as a Supplement to Group Coverage
Group coverage has its place in an individual life insurance portfolio, but it has its limitations. In some situations, it can make sense to layer individual coverage on top of group coverage.
The first limitation is that group insurance may fail to sufficiently cover the amount of death benefit needed by the client. With individual insurance, the client controls both the amount and type of coverage. Individual coverage can be temporary to cover short term cash needs such as paying off a mortgage, or permanent to cover future risks such as long-term care. Individual coverage can be structured to accommodate the specific life insurance needs of the client and because the client controls the coverage, it is portable and does not end at termination of employment or the discretion of the employer.
The second limitation occurs because group coverage is acquired without a health assessment and insurance carriers roll this increased risk into the price of the product. In contrast, individual personal insurance is based on individual underwriting results with rates locked in over the prescribed time. As a result, younger healthier individuals receive more favorable pricing. Consequently, individual coverage may be less expensive where the client needs more than the basic coverage provided by the employer.
How Can DBS Help?
Like a diversified investment portfolio, varied life insurance policies can provide your clients with a broader range of coverage. To help determine the appropriate mix of products, consider using this DBS product selector fact finder.