Optional Group Insurance versus Individual Insurance

You may be participating in a group benefits program through work, which offers the ability for you to elect optional group life insurance coverage for you and your family.  This is a convenient way to obtain additional life insurance coverage for your family, but it is not always the optimal way.

The benefits of optional life insurance through a group plan include:

• Flexibility to elect a life insurance amount based on a multiple of your salary or a specific dollar value;
• If you leave your employer, you normally have the option to convert this group life insurance coverage into an individual plan, subject to conversion rates and other limitations; and
• The premiums you pay are typically subject to a “waiver of premium”, which means if the employee meets a definition of “disabled” while insured, the monthly life insurance premiums are waived by the life insurance company for that period of disability.

While these are benefits to optional life insurance coverage, they are not beneficial to all:

• Life insurance based on a multiple of salary or a static dollar amount does not equate to what your family insurance needs are.  That can only be assessed by reviewing your financial situation and what needs for insurance exist if you were to prematurely pass away (e.g. dependent cash flow needs, funding of education plans, covering taxes or funeral costs, etc.);
• While optional life has a conversion feature to individual life insurance, the premiums associated with the conversion are typically quite expensive when compared to the premiums available if one were to underwrite new insurance coverage at that time (assuming they are in good health at the time of conversion); and
• The definition of “disability” under group plans can be very difficult to meet in order to obtain a waiver of premium.  For example, they may require a “total disability”, which generally means not being able to work in any occupation.  This may be a very difficult definition to qualify for, thereby requiring ongoing life insurance premiums during times of reduced income while suffering a disability.

There is no set rule of thumb in picking optional life insurance coverage versus your own individual insurance coverage.

However, there are several cases where obtaining your own individual insurance coverage in substitution or in lieu of optional life insurance is beneficial:

• Your premiums may be cheaper.  Optional insurance usually escalates every 5 years at set ages (e.g. 45, 50, 55, 60), whereas you can lock in premiums for 10 years or 20 years through your own individual term coverage.  Over the term of employment, there can be significant savings in locking in your term premiums.
• If you have very good health, your premiums would likely be materially lower in your individual life insurance versus the rates offered to you through Optional Life insurance.  This is because individual life insurance will reward you through lower premiums for very good health at time of underwriting.
• Where available, you can obtain a better definition of “disability” for the waiver of premium.  Or, you can elect to not pay extra monthly premiums for the waiver of premium if you feel it is an unnecessary cost addition to your life insurance.
• If you leave your current job, your individual insurance remains with you.  There is no conversion required that may escalate premiums.  This is a significant benefit for those who may change jobs throughout their remaining work life, particularly if a medical condition were to arise in the future that could reduce or eliminate future insurability with a new employer under their group optional life insurance plan.

If you would like to consider the pros and cons of your current Optional Life Insurance coverage, and whether you should replace this coverage with your own individual insurance, please contact me!  It could save you $ and future grief!

Call me at 604.789.3888 or contact me at marco@mgfadvisory.ca

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This post was written by Marco Faccone