Don't put all eggs in group life basket
By Rod Gibson • Bankrate.com

Being a groupie doesn't pay off when it comes to life insurance.

Financial planning and insurance experts warn that relying on group life insurance has serious pitfalls, even when it's free -- and it often isn't the bargain that people think it is.

Many employers offer free term life insurance to their workers -- often the equivalent of a year's salary and sometimes as high as three times' annual salary. That's a great deal, the experts say, as long as the recipients consider it a bonus to their overall insurance package.

What's usually not so great is the offer many companies make that allows employees to purchase term insurance from the same provider for up to three or four times their annual salary. This may not be as good as it looks at first glance, depending on the health and ages of the people insured. These policies often do not require a health examination or even exemptions for non-smokers, which can make it a bargain for high insurance risks, but a losing proposition for healthier policy holders.

"If you are willing to go out and get an individually underwritten term insurance policy, you can probably get a better rate," says Paul Graham, chief actuary of the American Council of Life Insurers.

The rule of thumb, says Graham, is that people should have five to seven times' their annual salary in life insurance, particularly younger people with families to raise and the prospect of sending their kids to college. Sometimes it should even be more. Group life insurance -- both free and supplemental plans -- won't be enough to cover those needs if the family breadwinner dies.

Young subsidize old
"The issue that should be considered in group life insurance is that it may well be that the younger employees are subsidizing the older employees and could buy it for less elsewhere outside the company than buying supplemental within the company," says David Woods, president of the Life and Health Insurance Foundation for Education, a nonprofit organization designed to address the public's growing need for information and education on life, health, and disability insurance. "They could be paying more than they should and older employees likely are paying less than they should."

Term life insurance has no accrued cash value and cannot be borrowed upon, as whole life and universal life insurance can. The younger and healthier the insured, the less the policy costs. Many younger people might be paying just $15 or $20 a month.

A vanishing act
In this era of corporate cost-cutting, another major pitfall in depending on group life insurance is that it can quickly disappear as a company benefit. The company could simply do away with it, go out of business or terminate your employment. You'll also lose it if you resign.

Usually, when leaving a job, the employee is allowed to convert group insurance to a private policy, but the option is often for a much higher-priced whole life policy. And even if it is a term policy, it probably costs more than you could otherwise pay -- unless age or medical conditions are factors -- because, "Insurers know the people who convert are usually those who have a higher risk of dying," says Woods.

"It is rare that group life insurance even remotely fulfills the insurance needs of a family," says Prof. Harold D. Skipper, head of the risk management and insurance department at Georgia State University.

Worst plan: no coverage
But perhaps the biggest disadvantage of relying on group life insurance comes when you leave a job that has provided it and find yourself without any coverage until you become eligible on the next job -- if that company even provides it. Rather than leave yourself without any coverage, the experts say, you'd be better off accepting that expensive conversion policy until the new insurance kicks in.

"I had a neighbor once who got laid off one job and was waiting to start another," says Woods, "when he fell off his roof and was killed. He was completely uncovered because he had depended upon his group life. It left his family in dire straits."

Term insurance keeps getting cheaper as people live longer and insurers collect smaller premiums for more years.

"It has been a pretty good bargain," says Howard Drescher, of the Life Insurance Marketing Research Association (LIMRA). "Many people like the convenience of buying it through the workplace."

But if price means more than convenience or if you're buying a supplemental policy, shop around outside the workplace. If you're getting it for free, use it as a supplement to a family's overall insurance and financial plan.

Rod Gibson is a freelance writer based in Georgia.

-- Posted: July 28, 2004