Is Your Company Group Life Insurance at Risk– The Sears Lesson
Posted in Life Insurance Tips last updated on August 18, 2019Many companies offer group life insurance benefits. It’s a great employee perk that provides coverage for your family.
A recent LIMRA survey shows that 108 million Americans have life insurance through a group plan. 102 million have coverage through an individual plan.
The major difference between the two types is one you have control over. The other, you don’t.
Quick Summary
Group life insurance leaves you with no control over the policy. If the company cancels it or you change jobs, then your family has no life insurance. Understanding the risks of this type of insurance is key to making smart financial decisions for your family.
Sears & The Group Life Insurance Catastrophe
Sear incorporated in 1893. It boasted exemplary success for the next hundred years.
Sears offered a generous benefits package that extended into retirement as one of their methods for attracting talented, hard-working people. This included group life insurance.
As the retail climate changed in the last 30 years, Sears began to lose money. Their profits deteriorated to the point where they started to cut back on employee benefits to stay afloat. Again, including the company’s group life insurance plan.
In the last year, employees were offered the opportunity to convert their term life insurance policies to permanent policies. Worse, employees would have to pay for their life insurance out of their own pocket.
While this is a hit to someone in their 30s, this proved devastating for the company’s 90,000 retirees. Between age and health conditions associated with aging, the life insurance option was just too expensive.
We don’t have numbers for how many retirees declined the coverage conversion, but news reports indicate it was considerable.
Now, through no fault of their own, families are facing new financial struggles that the group life insurance should have covered.
What Is Group Term Life Insurance?
There are as many types of group life insurance as there are companies who offer it. They aren’t all the same.
Most of these plans are term life insurance. Few group life insurance plans require a medical exam. Risk is instead spread through the entire group who chose to enroll.
Basic group term life policies offer between $25,000 and $50,000 in benefits. Depending on the company, yours might offer a supplemental coverage rider. It allows you to increase coverage, but you’ll pay the difference.
Pros & Cons of Group Life Insurance
Group life insurance can be a huge benefit to your family. There are excellent reasons that it may be the right choice for your family. It’s another financial decision where there is no “right” option for everyone.
Perks Of Group Life Insurance
Group life insurance works wonders for a term policy to cover your working years, providing you stay at that company.
It’s also an excellent policy to cover children until adulthood, again providing you’re planning on staying at the same company.
One of the best perks about group plans is coverage if you’re in poor health. For example, if you’re currently undergoing cancer treatment, traditional life insurance policies will postpone your application until a year or two after you fully recover.
Group plans spread risk over a large group of people, so the health of one individual isn’t as important. Most policies don’t ask much except for your age, sex, and how much coverage you want.
Pitfalls Of Group Life Insurance
There are some negative points to group insurance, depending on your situation. We can’t see into the future, like in the Sears case. There was no way for Sears retirees to know that the company would spiral into decline and cancel their retirement benefits.
Making the decision about what type of life insurance is best for your family will depend partially on your risk tolerance.
Inadequate Benefit Amounts
The majority of group life insurance plans offer $50,000 or less in coverage.
While a $50,000 safety net is better than no net at all, it won’t cover the needs of most families. If the average household in the United States carries $137,063 in debt, the group life policy won’t be nearly enough.
An easy way to tell how much life insurance you need is to use a life insurance needs calculator. This breaks down costs like:
- Number of college-bound children
- Mortgage
- Credit card debt
- Your income
- Family savings
- Burial costs
If your employer offers a group life insurance plan that doesn’t cost you anything, then it’s an excellent start to protecting your family. It’s also a good idea to consider supplementing it with a policy that you control.
Group Plans Aren’t Portable
The vast majority of group plans aren’t portable. (Virtually all of them aren’t, but the minute we say “none” is the minute someone points out that a friend of a cousin has a portable one.)
Portable means you can take it with you if you leave the company. For example, if you change jobs or get fired, you would still have coverage.
Most Americans will change jobs between 3 and 7 times throughout their working years. Your new company might not offer life insurance as a benefit.
Your health can change too. Suppose you develop a chronic disease at age 45. Individual coverage could become outrageously expensive, even impossible.
Individual policies are portable. It doesn’t matter if you change jobs or even stop working. As long as you pay your premiums, it’s there.
The Company Can Cancel The Life Insurance Benefits At Any Time
Then there is the situation in which Sears retirees find themselves. The company cancels the life insurance, with an “if you want coverage you can buy/convert to an individual plan” letter of notification.
While we believe that most companies would never do this unless they found themselves in dire financial straights, like Sears, it’s impossible to predict the economy for the rest of your life.
The company may go out of business, get bought out, or just need to reduce expenses. Which leaves retirees especially vulnerable.
Alternative Options
Group life insurance is a fantastic opportunity in specific cases. But what about when it isn’t a great option?
Term Life With A Medical Exam
Term life insurance with a medical exam protects your family when you have temporary needs for protection. For example, many families choose term life for covering a mortgage, safeguarding their working years, or covering their children until they’re financially independent.
Term life is simple. It only offers a death benefit for a limited number of years. You can add riders with additional features such as living benefits. You can choose the amount of coverage you need, generally with little limitation.
As some examples, we’re showing rates for a 20-year term policy below at different ages and benefits. These reflect someone who doesn’t smoke and is in relatively good health. Depending on where you live and your health, your rates could be even lower.
| | $250,000 | $500,000 | $1,000,000 |
|---|---|---|---|
Age 30 – Male | $16 / month $182 / year | $25 / month $300 / year | $45 / month $513 / month |
Age 30 – Female | $13 / month $153 / year | $20 / month $238 / year | $34 / month $391 / year |
Age 45 – Male | $33 / month $379 / year | $58 / month $673 / year | $109 / month $1,257 / year |
Age 45 – Female | $27 / month $303 / year | $45 / month $519 / year | $82 / month $950 / year |
You can use the Instant Quotes tool on the left (top on mobile) to see term rates right now for your age and benefit needs. Plus, it’s free.
No Exam Options
You can also get term life insurance without a medical exam.
These policies tend to cost a little more. The insurance company assumes a small percentage of people will lie about their health and claims will be higher than exam-based policies.
They still ask health questions on the application. Benefits limits are lower too. Although some companies are offering $500,000 or $1,000,000 in benefits with no-exam policies.
Permanent Life Insurance
If you need life insurance for estate planning, a term group policy doesn’t make any sense for you.
The cash value accumulation component of a permanent policy offers wealth-building advantages over term policies. You can use the cash value as a no-questions-asked loan or even supplement your retirement income.
Conclusion
For most families, group life insurance is a supplementary policy at best. First, consider the amount of life insurance your family needs. Then see if the risk of a policy that you lose if you change jobs is the appropriate decision.
How Abrams Insurance Solutions Can Help
While it’s impossible to predict the future, you can always ask for expert advice. We are a small group of insurance expects looking to make sure each family has the financial protection and foundation they need to thrive.
You can compare your group plan to an individual one yourself using the free Instant Quotes Tool on this page. You can also give us a call at (888) 905-0333, and we can walk you through the crucial components.
There is never any obligation to buy. We’re just happy to help.
