The Downside to Purchasing Life Insurance Through Your Employer

If you’ve started a new job recently, or it’s open enrollment season at the office, you’re probably facing some tough decisions regarding your family’s insurance. Many organizations now include a life insurance policy as part of their employment package. The cost is minimal, or often free, making it appear they’re offering you a really great benefit.

If your employer provides a life insurance policy to you for free, take it. They’ve made the process so easy – all you have to do is sign up. No medical exam and no long, drawn out medical forms to fill out. You often even have the option of having your group life insurance premium drawn straight from your paycheck, so you never really even miss the money.

Studies indicate this is the most popular life insurance investment amongst U.S. citizens, with group insurance plans providing $8.2 trillion of protection in 2014 alone. With more than 41% of life insurance policies purchased through a group life plan, it’s obvious that many consumers have weighed their options and feel that this is the best solution. While we agree you should take the policy, it’s important that you understand the pros and cons going into it, so your family has the financial stability necessary should the unthinkable happen. Let’s begin with the pros.

Pros of Buying Life Insurance Through Your Employer

There are 3 advantages to purchasing life insurance through your employer: price, acceptance, and convenience. To better understand the first, let’s first examine the concept behind insurance.

Insurance is defined as a pooling of risks. Individuals who aren’t in a financial position to take on a specific risk, transfer said risk to the insurance company. In this case, we’re referring to life insurance and the potential death benefit payout should a catastrophe occur.

For group life insurance policies, the pool of risk focuses on the insured workforce. The life insurance company evaluates the overall health of each individual and determines an average rate based on their findings. So, if you’re a non-smoker who is in great health, you’ll still be paying the same premium as your colleague who is the same age, with multiple health issues. If you’re offered a policy through your employer and you have serious health concerns, you may qualify for a much better rate through your group plan than you would on an individual policy. This is something that should be examined on a case-by-case basis, as everyone’s situation is unique.

Speaking of health issues, acceptance is the second pro to purchasing a group life insurance policy. You will likely be required to fill out a detailed questionnaire, but no medical exam is required for group plans. So, not only will your premium be lower, but eligibility is a breeze, making this the easiest and most affordable option for those with any kind of medical concerns.

Even for the simplest of insurance policies, investing in life insurance is a process. It takes time to shop around, determine the coverage you need, and understand the different options available to you. Purchasing a group policy removes all the guesswork. You may have some options regarding coverage amount but, other than that, the decisions have already been made for you. If you’re looking for a quick and convenient policy, purchasing one through your employer is probably your best option. Just be sure and understand the limitations so your family isn’t left without the protection they need.

Cons of Buying Life Insurance Through Your Employer

While the convenience of buying life insurance from your employer may seem tempting, there are some additional factors you should consider before making your final decision. Let’s examine the drawbacks to purchasing a group life insurance policy.

A recent study conducted by the U.S. Bureau of Labor Statistics indicates that the average number of years workers stay with their current employer is 4.2 years; and this number is expected to decrease in the coming years. It’s important to take this into consideration when purchasing a group policy, as your policy will cancel once you’ve moved on to the next stage in your career. If you intend for this to be your primary source of life insurance support, you run the risk of being uninsured if you retire, are let go, or change companies.

As mentioned earlier, if you have any serious medical concerns, a group life insurance policy might be your cheapest and safest option. If you’re a nonsmoker and are in good health, however, this is generally not the case. Before accepting the group life plan, speak with your insurance agent to review your options – they can likely help you save a considerable amount of money purchasing a policy outside the workplace.

Most group life insurance policies renew every 1 to 5 years. At the time of expiration, the insurance company will reexamine the risk pool and adjust rates accordingly. If you’re in the market for a more consistent policy premium, you’ll want to consider purchasing your own individual term policy, where the premiums are level and the policy term is longer.

It is typically recommended that consumers purchase policy coverage equal to 5 to 10 times their current annual income. Most group insurance plans limit employee coverage amounts to between 2 and 3 times their annual salary, leaving individuals underinsured.

While opting for group coverage sounds like a great benefit on the surface (and it is for many), it’s important for you to consider both the pros and cons before making your final decision. Speak with a qualified insurance agent to help you weigh your options. Make sure you understand the policy’s limitations and what the financial impact will be on your family upon your death. If you’re going to spend the time and money protecting your family, you might as well make sure your hard-earned dollars go as far as possible.