Is Group Term Insurance Offered by Your Organisation Enough?
In any organization or business, the most important asset is the human resource, i.e. the employees. The successful running of the organization and the processing of all other resources depends on the employees. An atmosphere of satisfaction in the workplace brings out the best kind of productivity in a person. So, it is important for an employer to ensure the security of their employees’ financial interests. This is usually done by providing a specific life insurance plan to everyone. Thus, the name ‘group term insurance’ is coined.
What is Group Term Insurance?
A group term insurance plan provides complete insurance coverage to each employee of an organization. It secures the financial interests of the employees and guarantees a secure future for their families in their absence. Many corporate organizations offer group term insurance plans for their employees, it is also, often, mandatory for many organisations to offer it..
From the time they join till they retire (the upper age capping is usually 70 years), all employees are eligible for group term insurance. This policy does not entitle the employee to any assured sum on surviving the term. It provides the payout of lump sum in case of death during the tenure.
The premium, irrelevant to the individual risk profile, is the same for all the insured persons in the group. Every employee pays the same premium amount for the same coverage, irrespective of their age or other risk factors. Since a group plan entails insurance cover for many people, its premium is much lower than individual insurance policies.
Why Employer-provided Group Term Insurance may not be sufficient?
You may assume you’re covered when your employer offers term insurance as a part of the package, especially if you don’t have kids or loans yet. But that may not always be the case. In such a situation, the group term insurance may not be sufficient for your future needs.
Here are four reasons why a group term insurance may not be enough for you:
- Coverage may not be enough
Although employer-provided life insurance is low-cost, your policy’s face value still may not be high enough if you have a family dependent on you. To provide your loved ones with enough financial support in case of your death, you probably need coverage worth six to eight times your annual salary. Some experts advise getting coverage worth ten to twelve times your annual salary, so the family can have enough to settle debts, pay rent and bills, and figure out a new source of income.
Most group term plans only pay coverage worth the employee’s salary. This amount may not be enough for many people, especially for those whose spouses don’t work and people who have kids or other dependents.
2. The same specifications may not be suitable for all
As employer-provided policies are provided to the group as a whole, you may not be able to choose the options that work best for you. For instance, the group policy offered by your employer may only cover you for a specific term, whereas your requirements may be much different. Or, it may only cover accidental death, but not an illness. If your employer provides the option to add riders, the extra premium will be deducted from your payroll, and you may not get the particular rider you want.
As the premium amount is not decided according to individual risks, a person at significantly higher risk (bad health, having a large number of dependents) than most may not have the required coverage that he/she needs.
For example, a 50-year old employee with pre-existing health conditions, having three kids would require different insurance than a 25-year old employee with one dependent spouse and no kids. Employer-provided group term insurance plans may be suitable for the 25-year old employee, but not for the 50-year old employee.
In such a case, he may decide to get an individual life insurance policy more suited to his needs. It would also allow greater flexibility and peace of mind.
3. Your Term insurance depends on your job security, or career
The biggest drawback of group term insurance is that it is dependent upon your employment. When you forfeit the job, you also forfeit the life insurance that came as a benefit with the job. Coverage automatically ends when an individual's employment terminates. At that point, it may be expensive as well as harder to get individual insurance.
It is unlikely for most people to stay with the same employer for their entire career. If you decide to switch jobs, you may be able to convert group term insurance to individual insurance. However, it would cost you much more, while not providing enough coverage. If your next employer may not provide any insurance, you will need to get individual insurance. But the cost of life insurance increases with your age. If you have developed a health condition meanwhile, your premium amount could become very high if you go for an individual policy, due to higher risk.
This is a major disadvantage of group term policies. It is valid only as long as you are employed, and changing jobs or careers would pose a significant risk if you only have a group term insurance.
This is why most people consider group term insurance a supplement, rather than the primary insurance policy. They get individual policies, as they are consistent, do not depend on your place of employment and can be customized as per your needs.
4. Group Term Insurance cannot be converted to an individual policy
Most employers don’t provide a reasonable option to convert a group term insurance to an individual policy which is more suited to your needs, if such a need arises.
For example, if you get the policy when you are younger and have no dependents on you, group term insurance may be sufficient for you. But if you have a family later, and decide to upgrade your policy or add some specific riders, it will usually not be possible, in case of group term insurance. Your life insurance should also change with you.
If you decide to leave your organization, there may be an option to convert the group term insurance plan provided by your company to an individual plan. However, if there is such an option, it will come at a significantly higher premium amount, and the coverage amount will also not increase.
As everyone is responsible for ensuring their own financial security, relying only on one’s employer for life insurance may not be very wise. Therefore, a group term insurance should not be the only source of life insurance. Also, one should not rely heavily on the life insurance they can get through work, and treat is as a supplementary insurance. About 70-80% of your life insurance should be directly through an individual term policy, carefully suited to the requirements. Although it may cost more than group term policies, it will ensure that one is covered through all phases of life, and that the coverage amount does not fall short.