Group Term Life Insurance

 

Relying on group term life insurance vs individual term life insurance is a huge mistake

 


employer provided life insurance is a must have benefit, but should it be the only life insurance you own?  definitely not! here's why...


The importance of employer paid life insurance can't be stressed enough.  Here's the question most employees should consider, especially when they land at a new job- whether group term life insurance vs individual term life insurance is better...



Companies must have it to attract and retain their workforce. Here in Silicon Valley even the earliest stage startups have life insurance as part of their employee benefit plans.  

They need group term life insurance to compete with the biggest of tech firms.(They also all have dental insurance plans which are a waste of money, but that's for another story)...

Even though most employers offer at least a minimal group life insurance benefit, families truly need to review these benefits often.

Make sure the amount of group term life offered by workplace benefit plans are adequate to protect them from financial ruin in the case of an accident or sudden death of the family's primary and secondary breadwinners.  It's rare that existing group life benefits will be enough for the the survivors to maintain their lifestyles without major disruption and hardship.


here are 4 big reasons why you should consider whether group term life insurance vs individual life insurance makes more sense and why you should buy your own


  1. group term life insurance stays with the Company even when you don't!-- face it, most 25-35 year old workers don't envision themselves retiring with the same company.  when you leave a job, all of those "free" employee lunches and your group term policies and medical insurance stay with the company you just left!
  2. Employer paid life insurance policies usually cover a flat dollar amount or a multiple of salary up to a plan maximum.-- Smaller firms, those under say, 50 employees, can't offer huge life insurance benefits.  A startup can't offer Google-sized benefits because they simply don't have a large enough population to spread the risk.  Google self-insures its plans to a point and has 10's of thousands of employees.  A startup relies completely on the group life company's risk pools and those companies don't want to offer unlimited group term amounts because they fear bad claims experience on a small number of employees-called "adverse selection".
  3. Group term life insurance premiums are taxable to the employees above $50,000.-- This point is often forgotten, but these excess premium taxes are based on the IRS Table I rates, which are extremely high.  Any group term benefits in excess of $50,000 are taxable at those rates and they add up!  If you're 50+ years old and have a group term benefit of 5x salary, you could be taxed on $5000+ of term insurance premiums.  This goes on your W-2 in box 13 and most folks don't even know it.  Some group term life plans allow you to opt-out of this work provided life insurance amount. Here's the verbiage from the IRS web site:IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes.
  4. group term life vs individual life rates are usually much more expensive-- Face it, if they give you life insurance at work, that's easy!  Everybody loves EASY.  No one likes to research term life insurance when they get to a new job, but this one really can pay off big time! If you're healthy and can pass a physical exam you can save hundreds, if not thousands of dollars per year simply for going outside of you company's benefit plan.  even if the group term plan is a voluntary life insurance plan where you pay the premium but there's no medical exam you will still save a LOT of money most of the time.  


taxable cost of group term life vs individual insurance 


You can see,on the IRS table below, just how expensive these taxable premium amounts can be.  If you're in you're a Millennial then it's not so bad YET... If you're in your 50's or 60's, these taxable premiums start to ramp up quickly.  If you are able, my advice would be to ditch the group term life insurance altogether if you are healthy.

Take this example--A female age 55 who earns $300,000 per year.  Her company gives her 3x salary to a max benefit of $1M, which is a common benefit scheme at large tech companies in Silicon Valley.  Her taxable benefit would be $850,000 ($900k-$50k tax free per IRS regs).  Based on the chart from the IRS, she would pay tax on premiums of $.43 per month x 12 or $5.16 per THOUSAND of group term life insurance!  So, 850( units of $1,000)x$5.16= $4,386!

If this women were healthy, she could get $850,000 of 10 year level premium term life insurance for $950-$1,000 per year!  Assuming she's in a high effective tax bracket, this options would save her a TON OF MONEY.  Group term life rates are typically priced in 5 year increments, so essentially for her, the group term plan is a 5 year level term policy.  I would encourage her to opt-out of the group term benefit at open enrollment if possible.



group term vs individual life IRC TABLE I

SAMPLE FEMALE INDIVIDUAL 10 YEAR TERM LIFE RATES.

SAMPLE FEMALE 10 YEAR TERM LIFE RATES


Group Term life insurance is not always a bad thing.  Here are 3 big reasons why you might keep this life insurance


  1. Group term life is "free"-- Amounts under $50,000 are not considered taxable income.  Remember, that small companies rarely offer group term insurance benefits in excess of this amount anyway, so this would be neutral on your financial picture.
  2. Group term life is easy-- If you don't need to actively do anything to get this stuff, then it's easy.  Simply keep the benefit and figure out where it fits into your overall financial picture.
  3. if you have health problems take the group life option-- Sometimes you won't have a choice because you're uninsurable.  If you are undergoing chemotherapy, if you've recently undergone a major coronary procedure, or are actively abusing controlled substances and /or alcohol, then grab the group insurance ASAP.

The bottom line when it comes to comparing group term life insurance vs individual life insurance is to make sure you do some research before you make an assumption that personal life insurance is too "expensive".  


Most often, it's simply not true and you can save yourself and your family a ton of money.  If you're on a tight budget, then it makes even more sense to get some term insurance quotes. It takes 30 seconds to go to the right side of this page and run some sample term life rates.  You'll find that it's amazingly cheap and EASY.  

Remember, everyone LOVES EASY! 


 

group term life insurance vs individual
Chris Acker, CLU, ChFC
 

Chris is an independent life insurance broker located in Palo Alto, Ca. He started helping families and businesses build strong financial safety net in 1985. He earned a BA in history from Williams College in 1985. He Earned the CLU designation in 1989 and the ChFC designation in 1991. He is a past board member of the local chapter of the Society of Financial Services Professional. He has been a member of the National Association of Insurance and Financial Advisors since 1985. Chris resides in Palo Alto with his wife, Carol and daughters Rachael and Samantha. In his spare time he is a regular platelet donor for the Stanford Blood Center and actively volunteers for various organizations and alumni groups.

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