What If I Have Life Insurance Through Work?

There’s no free lunch in life, but life insurance can be provided for free (or mostly free) sometimes. We’re talking about group life insurance, which many Canadian employers offer as part of their employee benefits programs.

July 6, 2021

Since the employer pays most or all of the premiums, signing up for group life insurance is a no-brainer. But you should think twice before making it your primary life insurance.

Continue reading to find out why…

What is Employer-offered Group Life Insurance?

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Employer-offered group life insurance is usually offered as a part of an employee benefits package. It provides a financial benefit to your family if you die before you expect to.

The employer pays most or all of the premiums. To get coverage, all you have to do is sign up. Even if you have to contribute toward the monthly premiums, group coverage comes out significantly cheaper than an individual life insurance plan.

What are the Benefits/Disadvantages of Group Life Insurance?

Benefits

Group life insurance offers several benefits, including the following:

Affordability

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Group life insurance policies are fairly inexpensive or free. Since the coverage is offered as part of an employee benefits package, the employer pays all or most of the monthly premiums.

Even if you are asked to pay a part of the premium, the cost to you is far less than an individual life policy because the risk is measured on the group as a whole, not on an individual basis.

Here’s an example to illustrate this point.

Let’s say you are 52 years old, while the average age of the group is 35. An individual life policy in your 50s can cost you a pretty penny — there’s no way around it. However, when you opt for life insurance through your company, the insurer will consider the average age of the group and charge you accordingly. That is, you’ll be paying the same premium as others, including those who are much younger than you.

Convenience

Group life insurance is the most convenient way to protect your family in the event of your death. The employer pre-arranges the coverage, available terms, and rate. To get the coverage, all you need to do is sign up. Also, these policies have a much shorter application process than individual life insurance.

If the group policy requires you to pay a part of the premium, your contribution will get automatically deducted from your paycheck. So, you don’t have to worry about the policy lapsing because you miss some premium payments.

Qualifying is easy

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The screening process in the case of group life insurance is less time-consuming and exhaustive. It generally doesn’t include a physical, and the coverage is guaranteed to all group members. You only have to answer some health-related questions at the time of applying.

By comparison, most individual life insurance plans require a physical medical exam. If you have a serious underlying condition, the insurer can even turn you down.

Disadvantages

Just like any other life insurance product, group life insurance has some drawbacks. Here are some key work life insurance facts you should be aware of.

Limited Coverage

The death benefit amount in the case of group life insurance policies is generally too small for a family’s needs. While the payout may vary significantly from one policy to the next, a general rule of thumb is one to two years’ salary. As you can guess, that is insufficient for an average family. In fact, it may not even be enough for those who are single.

Considering this, it comes as no surprise that people who qualify for group life insurance frequently ask, “Should I get optional life insurance?”

Our answer is YES.

While it is difficult to pinpoint the amount of coverage you need down to the penny, a general rule of thumb is 10 times your annual salary. At the very least, the payout should be large enough to cover all your debts. If you have kids or plan to have them, you may also want to set aside money to help cover education costs.

Lack of Control

A sick lady with her arm over her forhead.

Your employer owns the policy, not you. So, there’s always a risk that your employer may discontinue offering it as a benefit. Also, group life insurance policies are one-size-fits-all. You can’t always tweak the coverage to meet your unique needs.

Taxation

Your employer-sponsored group life insurance may be taxed, depending on how your employer has structured the benefit fees. By comparison, the payout of an individual life policy isn’t taxable.  

Limited Portability

You can’t always take your group life policy with you. And that can be a problem unless you plan to stay with the current employer forever.

Employees switch jobs every 4.2 years on average and change jobs 10 to 15 times in total. When you leave a job, the coverage that came with it may also end.

Just because your current employer offers life insurance, it doesn’t mean your next employer will too. So, when you change jobs, you may have to take an individual life policy to continue to financially protect your family.

If your health is not what it used to be, you could be in a tricky position. You may no longer qualify for personal life insurance at affordable rates. Worse, if you have a serious condition, you may not qualify at all.

Are All Employers Required to Offer Life Insurance as an Employee Benefit?

Providing group insurance to workers is optional for employers — not mandatory. However, many Canadian employers offer it as an addition to their employment benefits to attract and retain talent.

What Happens to My Group Life Insurance Coverage If I Leave My Employer?

A man carrying a box leaving his workplace.

You will likely lose coverage when you leave your employer. Nevertheless, you can retain the coverage when

  • you transfer the policy to your new employer
  • convert the group policy into an individual policy

The first option is ideal, but the chances of it working out aren’t great. You can transfer your existing policy only if (1) your new employer offers group life insurance and (2) uses the same life insurer as your previous employer.

If luck is not on your side, you may consider the second option. Most employer-sponsored group life plans include a conversion privilege option. It allows employees to convert their company life insurance into an individual life policy. However, the problem with this option is that the cost of conversion from group to individual policy is significant. Needless to say, once you convert to individual coverage, you’ll have to pay all the premiums yourself.

There’s a good chance you may be able to find a new individual life insurance policy at a better rate if you do some shopping around and are in good health. Generally speaking, the conversion option works out favourably for only those with a pre-existing health condition.

Is My Family Covered Through Employer Life Insurance?

Generally, an employer-paid life insurance plan will let you extend coverage to include your loved ones. You can include your spouse and dependent children below 21 years of age.

What is Individual Term Life Insurance?

A lady talking on her phone.

Individual term life insurance is a contract between you and an insurer. In exchange for monthly premiums, the carrier promises to pay your beneficiary a fixed amount if you were to die within a specific period.

Term life insurance provides coverage for a set period. If you outlive the policy term, your beneficiaries won’t get anything. Of course, you can renew the coverage before the term expires.

Term life insurance has level premiums and death benefits. That means your premium and death benefit amount will remain the same throughout the policy term. But with each renewal, the premium will increase because you are older and hence have a greater chance of dying within the policy term.

Here’s the lowdown on the key differences between group life insurance and term life insurance:

  • In the case of group life insurance, the employer owns the policy. Whereas, term life insurance is owned by an individual.
  • Group life insurance isn’t portable, but term life insurance is. The coverage ends only when you cancel the policy or don’t renew it.
  • Group life insurance can’t be tailored to your needs. You can customize an individual term policy to meet your family’s unique needs.
  • The death benefit in the case of group life coverage is usually small, in the amount of one or two years’ salary. You can buy as much term life coverage as you can afford, provided you are not elderly or in poor health.
  • Most group life insurance policies don’t require a physical, but most term life plans do.

Conclusion

Group life insurance is convenient and affordable (sometimes even free), and the coverage is guaranteed. If your employer offers group coverage, signing up for it is definitely worth it. But remember, the payout is small, usually one or two years’ salary at most. For this reason, you shouldn’t depend on it as your primary life insurance. You should still buy an individual life insurance policy — and this where Dundas Life can make a huge difference. We work with some of the best life insurers in Canada and can help you buy the best individual life insurance policy at the best price.

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