With fall open enrollment underway, millions of employees will soon begin their annual trek to benefit fairs to consider changes to their employer-provided benefit programs. Normally a pedestrian and regimented affair, given recent government and corporate cost-cutting, navigating this year’s open enrollment season promises to be more challenging.
“Due largely to the economy, employee benefits packages have been noticeably scaled by employers and there has been more movement in the job market,” says Gary Lardy, CEO of IntelliQuote (www.intelliquote.com), an online life insurance agency. “Now more than ever it is important for employees to weigh the benefits of purchasing an individual life insurance policy in addition to, or instead of an employer-sponsored plan.”
And, as Lardy explains, it’s not just the quantity of benefits now offered that’s an issue, it’s the quality. “Many times, the benefit information explaining various term life, disability, health, dental and vision insurance options is so filled with technical jargon that employees don’t understand what they’re reading – they may not spot the deficiencies. Often, the coverage is far less comprehensive than they may believe.”
Real costs of Basic coverage for employees.
“The idea behind offering life insurance coverage in employee benefit programs is that a policy is supposed to be cheaper than individual insurance,” Lardy says. “Often that’s true for a plan’s ‘basic coverage’ because the employer is paying part of the cost.”
Basic coverage, however, leaves most people drastically underinsured so additional, unsubsidized coverage is also offered. All group insurance is based upon an assumed average health rate of all members of the group, so the true cost to the employee may be exponentially higher than an individual policy.
For example, a 40 year old male on a group employee voluntary life plan may pay $1.56 for every $10,000 of benefit provided. For $500,000 of life insurance coverage, the employee may pay $78 a month – however, this rate is only guaranteed for 2 years, and coverage is terminated if he is no longer employed by the employer. The same 40-year old male could purchase a 10-year individual term life insurance policy with $500,000 worth of coverage for $68.75, or just $1.38 for every $10,000 of benefits provided.* This policy remains in-force with the employee for the duration of the term, and is not contingent on his employment status with his current employer.
While employees can fill in the holes in the individual life insurance market, many younger workers don’t give the matter much thought – they’re healthy so the issue doesn’t come up. As they get older, they become increasingly familiar with the caveats of coverage, but by then life insurance costs may have become prohibitive. “Life, disability and medical insurance premiums are all based upon age and health,” Lardy explains, “and even middle-aged people can have problems qualifying for standard rates.”
Innovation in Life Insurance
The good news is that individual insurance coverage has undergone substantial innovation in the past 10-15 years, resulting in plans with increased flexibility and lower costs. “Insurance innovation was largely due to two factors,” Lardy says. “First, powerful computing has allowed insurance companies to make far more nuanced calculations with respect to risk/reward ratios. Second, the kinds of financial products in which insurance companies can invest to offset ‘outlier risk’ have dramatically expanded.”
An accident of history, the reliability of group employee benefit programs, and their central role in financial and retirement planning, is increasingly uncertain. Already, benefit programs are skeletons of what they were and it seems that this diminishing trend will continue as benefit costs to employers increase.
With respect to life insurance coverage, Lardy advises, “If your employer offers basic life insurance coverage for free or at highly subsidized rates, it makes sense to take advantage of the coverage. But by purchasing an individual life insurance policy on your own, you not only control your own coverage and costs, but you lock in your monthly premium and remain covered for the term of the policy regardless of your employment status or benefits package.” In fact, healthy 30 and 40 year olds can often find affordable rates on individual policies with a guaranteed term of 30 years. And the younger you are when you purchase an individual policy, the better: “Age and health-based life insurance is counterintuitive. Often it’s best to buy it when you don’t need it so that you can afford it when you do.”
*Average monthly premium as of August 2, 2010. Assumes a 10 year policy with a $500,000 death benefit for a 40 year old male, non-smoker, preferred.