Knowing the advantages of any given policy is a vital step in making the right decision. However, disadvantages should also be addressed to help make the most educated decision. Below are 10 common disadvantages to a Group Life Insurance:
- Group life insurance is temporary in nature – it runs out or is significantly reduced at the very time most clients need it. This drop-off particularly impacts wealthy clients with high postretirement living standards.
- The Table I cost (reportable income for tax purposes as discussed below) increases significantly as insured individuals grow older. Ironically, in the postretirement years when medical and other expenses are high, but income is low, the reportable income from group term life—and, therefore, the tax payable—is highest.
- Because group life insurance is a welfare benefit plan, it is subject to certain ERISA (Employee Retirement Income Security Act) limitations and requirements, including certain reporting obligations.
- The employer must provide group life insurance coverage for a number of employees. This may increase the employer’s cost significantly over nondeductible plans that allow the employer to pick and choose who the plan will cover, and on what terms.
- The employer’s out-of-pocket cost can skyrocket if no new employees enter the plan. This is due to the yearly renewable term aspect of group insurance. As the pool of employees grows older, the average age increases and, consequently, premiums also increase. This problem is particularly acute in professional corporations with little employee turnover.
- A group term life plan cannot cover shareholders who are not employees. Further, the employer flexibility is limited in picking and choosing who the plan will cover, the amount of coverage, or the terms and conditions of coverage. This is because the plan must include certain design features in order to insure that it meets certain tax law requirements listed in Section 79 of the Internal Revenue Code.
- Employees have no guarantee that the employer will continue group coverage because a group policy is a contract solely between the employer and the insurer. Therefore, the employer may discontinue or change the plan without employee approval. Furthermore, retired employees may lose postretirement coverage if an employer files for bankruptcy.
- When an employer terminates an employee or the employee leaves the employer, the employee loses the group insurance protection. Although a conversion option may be available, relatively few persons ever execute this privilege because of the higher premiums at the attained age and likely less-than-favorable conversion policy pricing. Furthermore, if many employees did, in fact, exercise the right to convert, group insurance would become highly expensive for the employer because the insurance company typically imposes a conversion charge on the employer when an employee chooses to exercise the conversion feature.
- By design and formula, group protection generally ceases, or is significantly reduced, at retirement. Even if a reduced amount is continued after retirement the protection may end after a specified duration or at a stated maximum age.
- Employees may be lulled into complacency, being under the misconception that the group term provided by their employer provides adequate benefits and therefore, not utilize the services of a professional insurance agent. Adequacy of coverage does not necessarily equate to the proper arrangement or ownership, nor does group term provide the collateral planning advice found only through competent financial services professionals.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM