A. When you have a family, it is extremely important to keep everything in perspective. That includes planning for them in the event of a death.
Fortunately, there are a few ways to go about protecting your loved ones. By combining the advantages of different insurance products, you can help ensure that their future quality of life and goals stay within reach—without placing undue pressure on you today.
Just as it may be important to diversify an investment portfolio, choosing a few different life insurance options can offer you a broader range of coverage opportunities. After we review the different types that are available, you'll have a better understanding of how each one works and the potential role they could play in your overall protection strategy.
Step one: Review your group life insurance options
Employers own the group policy and offer coverage to eligible employees, either at no cost as part of an employee benefits package, or as an elected benefit, at a group rate. It’s important to understand that for employer-paid or -provided benefits, the employer determines coverage limits, controls the policy, and can change or discontinue it at any time. Unless provisions within the policy allow for it, this type of coverage will end when you separate from service with your employer.
Group insurance rates are based on the makeup of the group of employees or members who are covered and, when coverage is provided to all eligible employees, do not take into account the health issues of any particular individual. So, there is no individual health assessment—or personal underwriting—involved. Group life insurance rates are based on both the volume and risk profile of the entire group.
Typically, employers will make some baseline level of life insurance coverage available to all eligible employees. Sometimes an employer will make additional optional life insurance coverage available that the employees must elect and pay for themselves. In these situations, there may be an amount available without evidence of insurability (proof of good health) when an employee first joins the company, but coverage must be elected right away, often within 60 days of employment. The employee may elect coverage at a later date but, if so, he or she will generally have to demonstrate evidence of insurability, much like with an individual life insurance policy.
Step two: Consider individual life insurance coverage
Individual life insurance is most often purchased to insure one life. Some individual policies may include additional lives (typically children) through a policy rider.
Individual life insurance can be temporary (for example, term) to cover a certain number of years, or permanent (for example, whole life) which is intended to provide coverage until a person’s death. Permanent policies typically have a savings element that is referred to as a cash value. The cash value of a policy accumulates over time as premiums are paid. For both temporary and permanent forms, individuals must go through a health assessment (underwriting) to determine coverage eligibility and cost.
In this case, unlike with group life insurance, the individual controls the policy and chooses the coverage amount, term (if applicable), and any optional extra coverage (riders). Typically, an individual policy stays in force as long as the owner continues to pay the premium, or if there is enough of a cash value in the policy to sustain it. Also, unlike with group policies, the individual life policy is portable, so, regardless of your employment status, a benefit will be provided as long as the contract is in force when you die.
Group vs individual coverage
The chart below details some of the major differences between group and individual life insurance. Understanding these differences will help you see how each type of insurance might help play a role in your own financial plan.
Weighing the pros and cons
Typically, for people who do not pass preferred underwriting guidelines for individual coverage, group life insurance is an attractive option. Purchasing additional coverage—beyond what is provided as an employee benefit at group rates—will help these individuals meet their full life insurance need. But that may require an individual medical exam, which may prohibit coverage at a potentially favorable group rate.
Alternatively, for individuals who are in favorable health and meet the preferred underwriting guidelines for individual coverage, it will likely be in their best interests to meet their full life insurance needs with an individual policy, because their health status may qualify them for more favorable pricing than the employer’s group rate.
Even if group life insurance covers three times a person’s salary, it may not be enough. That’s because it takes a lot more to replace lost income over a number of years. In fact, according to Fidelity's estimate, an individual who is approximately 25 years from retirement and looking to replace a before-tax income of $100,000 would need approximately $1.4 million of term life insurance.
It’s important to have an individual policy to help cover your insurance needs. This way, if you’re either out of work for a while, or change jobs and can’t get the same level of coverage through your new employer, you will have a policy in place to protect your family.
Step three: Layer your life insurance coverage
For many people, combining—or layering—the best aspects of each type of insurance can help them build a protection plan that is right for them.
A layered approach, using both group and individual coverage may be the best way to tap into the advantages of each and form a solid life insurance plan because by doing so, you diversify your coverage sources to meet your total life insurance needs. This allows you to blend the benefits of a group life insurance policy’s ease of attainment with an individual life insurance policy’s portability and control.
Use group coverage as your small base layer, then you might add an individual insurance layer, based on your budget, and what you might need at different stages of your life.
Of course, what goes into that individual layer could change over time. Many people fill the largest part of their individual insurance need with term life insurance, given the lower cost.
Since term life insurance is designed for income replacement during your working years, you may not need it if you can afford to retire. Based on your budget and the possible need to transfer wealth at some point, you could also add a layer of permanent insurance now while you are in good health or revisit whether you may need to add permanent insurance later in life.
If your plan is right, individual insurance will be about 80 percent or more of your total coverage.
Ultimately, what you hope to create is a life insurance program that not only fits your budget, but includes key ingredients to help serve specific purposes within your financial plan.