The pros and cons of group term life insurance through work can be classified into good, bad and ugly. We talk about it all, with no more movie references on this episode.
Thank you to our alert viewer who inspired John to riff on this question! He has a lot to say and has been holding all this information in for way too long.
Many workplaces offer group term life insurance. You can get it through membership associations, too. These plans have unique plusses and minuses. Usually, they're not enough, but, hey, they're often easy!
Check out our episode next week on which employee benefits to pick:
We talk about the pros and cons of getting term life insurance through a group versus going out on your own and getting coverage. When is it a plus? When is it a minus? Plus John explains the pricing tables!
Here's Bridget's firm website: https://www.sullivanmermel.com
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
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TRANSCRIPT
John: We recently had a great viewer question which basically asked, what's the big deal about group life insurance? Why do people think it's so good? We're going to talk about that on today's episode—some reasons why group life insurance is a really good thing. We’ll talk about a few drawbacks to it, and, by the end of this episode, you're going to have a framework to be able to think about your group life insurance. Hi, I'm John Scherer and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel and I've got a fee-only financial planning practice in Chicago, Illinois. John, before we move on to talk about group term life insurance, let's ask people to subscribe. It helps our credibility with YouTube and helps us reach more people.
So John, I love this question, too, about group term life insurance and, honestly, you know so much more about this than I do that I wanted to ask your opinion. So how should we think through group term life insurance?
John: Yeah, like I said, super good question. I really appreciate it. One of the things we talked about in a recent episode is, “Hey, I got coverage through work, don't I have enough?” And the answer is usually, no, you probably need a lot more than you get through that basic stuff through work. So what is the value of that which you get through work is the first legitimate question.
And there's a couple of things that I think it plays a good part in it. One of these things not to be overlooked just to start with, is that it's easy. You sign up for your health and your group benefits and it's just sort of done for you. It's easy to overlook the idea that…How many people come into your office as new clients or to mine and say, “Oh yeah, we've been meaning to get more life insurance. Now we've got a family…” or different things and it's not a priority. So taking action, there's some value in that, I think.
Bridget: Well, the people who need life insurance are the most overwhelmed and unable to deal with—you know, they have so many things on their to-do list—that the easiness is actually a major benefit of it. You can actually, at least in one plan that I'm familiar with, set up a certain amount that you can get without a health exam, so that's even easier. So you can get a certain amount without a health exam and then more with a health exam. And so if you don't want a health exam for whatever reason, it's easy. It's so much better than nothing.
John: Right. And that easy button or at least one of the other big things, and certainly one for me, is the idea of if your health isn't the greatest—people find out as you get into adulthood they've got different things going on—there are many group policies that you can get a basic amount with no underwriting, meaning no medical exam. And some even have where you can buy some extra things with none of those medical exams or very little. And you think about that for a healthy person—somebody who’s got nothing going on—the group insurance is probably a little bit less expensive, but you can probably buy something on the open market, and it doesn't save you very much money.
If you're somebody who's got some health concerns—you find out you have some kind of liver disease or something going on, you develop a condition—going out and buying it in the open market, if you can even get it, might be really expensive. If you can get it as part of this large group where they spread the risk out, and say, “Listen, we'll give you one times your salary with no medical underwriting,” that can be a really great deal, right? It can be a really beneficial option for you.
Bridget: So your second point is, okay, it's easy and it's available, right? It might be a lot cheaper for you, particularly if you have a medical condition.
John: That's right. I think that's one of the places. I haven't come across this in a long time, but being a CPA, maybe you're familiar with the AICPA. They used to have a very prominent group as part of that organization. So we're talking about employers here, largely, but sometimes groups. For example, you're in the AICPA or the Bar Association or other professional organizations. They can offer these sorts of benefits. AICPA used to be famous for their rates. And it's all published. You know what it is.
But for younger folks, I mean, they were just dirt cheap. You couldn't get that anywhere on the open market. Then when you got to be 35 or 40 or 45 rates started to go up and then they were very uncompetitive in the open market. And you think, “Okay, what's going on here?” Well, listen, when people start off having families, typically in the younger ages, you go, “Geez, this stuff is dirt cheap. Let's get this.” Well, what happens is that as people grow through things they don't need as much coverage.
It starts to get really expensive, so they drop it. But think about this, Bridget, who keeps coverage into their 40, 45, 50s, when it starts getting really expensive? The really healthy people that expect to live another 50 years? Or is it those people that who find out things like, “I've got Hodgkin’s disease”; “I had this come up”; “I had that come up, and now my health may be a little bit shaky”; “I'm 45, and I still got kids at home,” let's say.
So you go, “Geez, having a million dollars of coverage makes some sense. Having a half a million dollars of coverage means my life expectancy is compromised. So my choices are to drop the coverage and have zero or to pay this really high rate. But I might need it.” So it's that sort of thing. It can be really valuable on those types of things. Yet, that's sort of where they make their money, if you will, as it's cheap at the young years and it typically gets more expensive, so you have to keep an eye on that. But that's a place where it makes sense for folks.
Bridget: Right,
John: Like having that group coverage.
Bridget: Yeah, and I wanted to just point out that we've moved past just employer coverage, which is a good place to look, to other groups that you might belong to or might be able to join. So this is the bar association, this is the CPA association, this is whatever industry association. They often offer group plans that they've negotiated and they can be a great place to look.
I guess I haven't bought life insurance through them, but I've bought other insurance through the AICPA and other group-like membership group plans. So it's another good place to look. And again, there are similar plans to the one you get at work in many ways, but they are something you can join. So if you don't have a plan at work, you can go look at these other organizations and say, “Okay, do I want to look at these group term life?
John: Right. And maybe a better term rather than employer is a group plan. It's oftentimes employer, but also these other associations, as you mentioned. When you think about a situation—think about my kids came late in life. Thus, somebody who's in their 40s when they have children—health doesn't typically get better with things. And so we tell people all the time when you're in a spot where you go, “Listen, getting insurance, maybe I can get some but it cost a lot on the open market.” Are there associations that you can join? Maybe you haven't participated in this or that organization, but you start to ask around.
We have clients that go, “Oh yeah, they said AICPA is a relatively famous one in our world. But this organization offers some group health insurance for my business and yours.” Right. Small company. There's not tens of thousands of employees so you get a great group package. But these associations can be a really good place to start looking. So maybe that's just a little bit of a segue, but I think a really important thing for people as they're looking to get some insurance coverage. It’s typically because “I've got the family now” and “I've got some dings on my health.” Maybe some of these associations, Chamber of Commerce, even those sorts of places where the insurance companies can pool the risk, can help get some coverage from that standpoint.
Bridget: Let's talk about potential downsides of group term health.
John: Yeah, there are a couple of them. We already mentioned one of them, which is that they get expensive over time. So if we take somebody who is, let's say somebody who’s 30, and now they're in the position to need some insurance. They know, “I can get it really cheap through the AICPA.” Or, “I can pay a little bit more and I can get it on my own.” We usually recommend that they think about getting it on their own because that rate is going to stay lower over time. We're not going to have those increases.
Somebody who's 30 or 25 might say, “Listen, in 20 years…you know, I'm having kids now. In 20 years I don't need the coverage.” That's a very legitimate choice. Certainly a good position. But again, I'll go back to, “Yeah, I'm 42..” How many people do you know that have had: “I’ve got this crazy cancer,” “I’ve got something going on.” And now you go, “Holy moly, this is something where this insurance is really a big benefit.” Maybe even if the kids are out of the house, you realize you want to have this.
If you own and control the policy and you've got those locked in premiums compared to the increasing scale on a group plan, that could be a good deal. So the drawback might be it’s cheap when you're young, but if you find out something changes—for example you have a child later in life and now you need to keep the coverage—having individual coverage can really be a big benefit to you.
The other big one that people don't realize for those group plans is that both the company or association, as we're talking about, and the insurance company get to decide whether those policies, those plans, stick around. So, I mean, literally, tomorrow your company, the association, the insurance companies can say, “You know, this is not that good of a deal anymore for us so we're going to drop the coverage effective July 1.” Suddenly you have no coverage.
Whereas, if you have a policy with an insurance company in the policy, it says they have to keep the coverage in force as long as you pay the premiums. It doesn't work like that in a group plan. And again, what are the chances that happens? I don't know. But you don't want to find yourself in a spot when you're 45—and now you've got some health concerns and you've got little kids—to find out that, “Hey, my group coverage is going away.” So those are some of the drawbacks to that side of it.
Bridget: Right. You want your insurance to feel like a safe place. So there's just a little more uncertainty because they can drop these policies.
John: That's right. I was just going to say one other thing as we think about those group plans. Again, typically it's from employers, as we see. It can be really nice to get some coverage on family members, a little bit of coverage. That can be kind of nice. One thing that we don't recommend and we see often is what's called accidental death and dismemberment. If you ever read those things, it's a funny thing to read. I mean, not funny funny, but if you lose one hand, you get paid less than if you lose one hand and one foot. If you lose two feet and three fingers…or these different things ,then you get payouts for it. Or if you die in an accident versus dying from a cancer or from natural causes.
Those things sound good. They're really inexpensive, but they're inexpensive for a reason because the payouts generally don't qualify. It's sort of like, “Listen, if you need coverage, does it make any difference whether it was cancer or car accident?” If you need the coverage, you need the coverage. So we usually see those on the group side of things and those are typically not worthwhile.
Bridget: Yeah. And one other thing I just wanted to highlight with plans through work or with organizations is that with the organization you have to keep your membership up for insurance. With an employer, you have to stay with the employer. Also, they can drop the plan. But also, I have seen in my lifetime plans that you could take with you, but more often I've seen that you can't. So this goes away. Most people, I don't think, want to be beholden to their employer only because of their life insurance policy, because of the license. So that's another thing to consider.
And you would think, “Oh, keeping my membership up for this organization is no sweat.” But, again, we're busy. We have things to do. Again it is not something you really usually want to think about or think about that much. So it's one of those things that can slip through the cracks. Just paying it. So it's a little bit more complex. Even though it seems easier to get it through an association, it's a little bit more complex.
John: That's right. Kind of circling back on that question, what's the big deal? A lot of people like group life insurance. It's easy. It's often inexpensive. If you got some dings in your health, it can be the way you can get coverage.
Bridget: It’s much better than nothing.
John: Right. You probably need some outside of work if you're in the right circumstance and you need it. But it's not like the group coverage is not a good thing, is not valuable in some fashion. So hopefully that answers that question. This is probably a good time to wrap things up here. Just to remind everybody that both Bridget and I are members of the Alliance of Comprehensive Planners, a group of nationwide fee-only planners that believe in holistic planning. If you like what you hear on our show, check out acplaners.org to find an advisor in your area. And don't forget to hit that subscribe button.
Bridget: Right!
John: And don’t forget to hit that subscribe button. Beat you to it this time! 😊Hit subscribe so you can find us.
Bridget: Thanks, John.
John: All right, thanks. Bye.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.