For many years, I’ve heard the same conversation come up again and again. People often think that they don’t need to own life insurance personally because they have a great benefit plan at work that provides them with life insurance as well. This often opened the door to a longer conversation about the life insurance that their employer provided them with. Many people knew that they had life insurance at work, but didn’t know how much coverage that plan actually provided for them. And if they didn’t know that number, they certainly didn’t know if it was enough coverage to take care of the needs of their beneficiaries. People get stuck on the idea of being ‘double insured’ and paying for two policies. They ask the question: ‘Why would I own life insurance personally if my employer provides it as part of my benefit plan?’ With this thought process in mind, I thought it might be a good idea to compare the life insurance that you can get from your group benefit plan with the life insurance that you can own personally, to make sure that when it comes time to figure out which is best for you as a policy owner, you can make an informed decision.
In This Article:
Why is this Important?
A recent poll showed that sixty-two percent of Canadians who own life insurance also get coverage from their employer via a group benefits plan. When you look deeper into the 62% of people who have coverage from a group insurance plan, 53% of those people rely exclusively on this coverage for the only life insurance they have. This means that outside of their group life insurance, they have no other coverage. This is especially true among employees in the age group of 30 to 50, which is an age where people are most likely to have things like mortgages and other large liabilities, as well as dependents. When you look at the financial responsibilities and then the limits on how large a group life insurance death benefit typically is (one or two times your annual salary is fairly common for the death benefit amount), you can see that there may be a significant shortfall in what someone needs versus what they have available.
Identifying the Players
There are differences between group life insurance and personally owned life insurance that you need to understand. To understand what is the best fit for you, it is essential to know how group life insurance and personally owned life insurance policies work and what the differences between the two are.
Group Life Insurance
- Linked to a master policy owned by your employer. This limits flexibility as the options available are defined by the employer’s master contract.
- Will have guaranteed acceptance levels (some coverage regardless of your health)
- There are coverage amount limits. Typically limited to one or two times your annual salary as a maximum.
- Not portable. Coverage is linked to maintaining your employment
- Reduction and expiry. Most policies include the clause that at age 65, your death benefit drops by 50%, and at age 71, it terminates.
- Premium rates can change every year based on the renewal rate attached to the group policy
Personally Owned Life Insurance
- One policy covers the life (or joint lives) insured.
- Not linked to your employment, personally owned means that as long as you pay the premiums, the policy can remain in force regardless of where you work
- Medically Underwritten. The policy will have underwriting requirements that you must meet for the insurer to issue the plan.
- Premium stability – the premium payable for the policy will be laid out in the original contract. If it is a renewable term plan that will detail what the premium is at each renewal point until the policy expiry is reached. For Whole life coverage, the premium will be defined in the original contract and will not change for the entirety of the policy.
- Customizable. As long as you meet the underwriting minimums, you have complete control over how much coverage the policy’s death benefit is.
Here is a table that summarizes a few of the key differences:
| Category | Group Insurance | Personal Insurance |
| Underwriting | Minimal / none | Full underwriting |
| Customizable | Limited | Highly customizable |
| Portability | Usually lost when job ends | Fully portable |
| Stability | Employer controlled | Policyholder controlled |
As an additional highlight, here are a couple of other key differences between group life insurance and personal life insurance that bear more explanation:
- Premium pricing – For group insurance, this is based on the demographics of the group, so things like the average age and the gender distribution of the entire group will influence the cost of the life insurance. For individual plans, the premium calculation is based solely on the applicant’s information.
- Taxation of the death benefit – For group insurance death benefits to pay out tax-free to beneficiaries, the policy must have either had the employee pay the full premium as a payroll-deducted item or have the premium charged to them as a taxable benefit. For personally owned insurance, the premium is always paid tax-free to beneficiaries.
Which is Better for Me?
The constant theme for this type of answer is that it always depends on your unique situation. There are some items that are worth considering when you are deciding what coverage is best for you.
As we mentioned earlier, group life insurance is essentially linked to the time in your life when you are working. If you leave an employer that offers a benefit plan, you may be entitled to convert the group insurance into an individually owned life insurance plan without medical underwriting, but that plan will only offer coverage to you until you reach age 65. This means that if you’ve relied on group life insurance coverage your entire career and you still have an insurance need when you retire, you may be forced then to look at getting personally owned insurance anyway, but at a much higher cost because of the age that you are at when you apply.
When it comes to affordability questions, you need to remember the note about how the premiums are calculated for the two different types of insurance. With group life insurance, the premium is based on the demographics of the group, including the average age and the distribution of males versus females. The premium that you pay will be based on those demographics. If you are older than the average age, it may be less expensive to have group coverage than personally owned coverage because you benefit from the pooling effect of the lower average age. The reverse is also true; if you are younger than the average age, you will see a higher premium for group insurance than for personally owned insurance. Group life insurance will also have a premium that may change annually, given that the demographics in the group (age and gender distribution) can change every year as well. For personally owned life insurance, you will have the premium that you pay laid out in the original policy document. This means that you know exactly what it will cost every year from the time the coverage is issued.
Medical issues can play a role in your decision as well. Personal life insurance plans will have medical underwriting carried out at the time you apply for the coverage, and the insurer can choose to issue the coverage at standard rates or modify that based on the findings of the underwriting process. With group life insurance, there is a standard amount of coverage that every employee can have, regardless of their medical situation. This is called the ‘non-evidence maximum,’ and it is exactly what it sounds like. This is the amount of death benefit that anyone who is a member of the plan can have, regardless of their personal health situation, when they join the plan. If you have a hard time qualifying for personally owned life insurance, then your group life insurance from your employer is a great fallback because of its guarantee to provide you with coverage while you’re a member of the group.
Final Thoughts
One thing to remember is that you can actually have both types of insurance as part of your financial security plan. When you complete a needs analysis you can enter in any group benefit life insurance plans that you have while calculating your total coverage need. This is an essential part of insurance planning for everyone. Taking the time to figure out what you need and making sure that you have enough insurance to cover that need will make it much easier to sleep at night knowing that if the worst-case scenario happens, your beneficiaries are looked after. If you are interested in speaking to an expert about how your group life insurance can work hand in hand with your personal life insurance plan, reach out to one of our advisors today and speak to one of their expert advisors.
