Individual Life Insurance for Employees

Since the pandemic, more companies have started to offer health insurance and group life insurance than ever before.

Still, more than 100 million individuals in the United States don't have sufficient coverage to provide their families with financial security in case of a tragedy, according to the 2022 Insurance Barometer Study by LIMRA and Life Happens.

One of the main barriers to financial security is the low coverage that basic group life insurance policies provide.

If businesses want to help their employees — your clients — achieve financial security, they must go beyond the benefits offered through standard group life coverage.

Here's what you need to know about the way companies offer your clients life insurance now and how that could change in the future.

Life Insurance Today

When employers started offering group life insurance policies, many workers who wouldn't otherwise have access to life insurance suddenly had coverage, however limited.

Group insurance policies are attractive because their approval by an insurer is virtually guaranteed.

Some of the main features of group life insurance include that client companies usually need to renew group insurance policies year by year or every five years.

The premiums are low, so group life insurance is affordable for most companies.

Coverage is usually fixed rather than based on the individual's health.

Some basic policies provide minimal coverage for a spouse and children, or employees can purchase supplemental insurance for better coverage.

Unfortunately, there are some downsides to group life insurance.

First, group insurance isn't portable if an employee changes jobs, because the business owns the policy.

This means that some employees who resign or lose their jobs are in for a rude awakening when their policies suddenly lapse.

Second, group insurance coverage is very limited.

An average basic group life insurance policy only amounts to one or two times an individual's annual salary.

This is far cry from the recommended level of five to 10 times the individual's annual income. Which means, should the worst occur, the employee's family will be left substantially unprotected beyond the first year or so.

It's true that employees can also buy supplemental life insurance through their employers, though such policies can still have limits.

But for that increased coverage, most employers and insurers require additional forms and proof of insurability, which can take several weeks to process, plus in some cases medical exams.

Today we're accustomed to purchasing items on Amazon and having them shipped to our house within 24 hours, or paying for groceries and having them delivered to our doorstep within an hour.

So, a weeks-long wait for life insurance can seem a little excessive.

Plus, supplemental life insurance usually has to be renewed on an annual basis and premiums can change from year to year.

The downsides of group life insurance aren't limited to those for employees.

Since supplemental policies are still through an employer-issued certificate, companies have to deduct the cost of the policy from their employees' payrolls.

That means more paperwork and administrative burden.

Finally, the supplemental policies through an employer can be more expensive than a typical individual life insurance policy.

So, in all, group life insurance or even supplemental life insurance through an employer isn't always the best option for providing your clients with financial security.

Additional Coverage Options

Here are three reasons individual coverage is better:

The individual (employee or dependents) owns the policy. Since they own the policy, they keep the policy beyond employment.
The premiums are based on the individual's health status and in most cases will be priced significantly lower than group insurance.
The employee and/or dependent can personalize the coverage by choosing the term length and the coverage amount.

Not everyone can qualify for an individual life insurance policy. If a client's health is very poor, the client may struggle to get approval for an adequate policy.

Still, those who have both individual and group life insurance policies have the highest chance of providing financial security for their dependents.

Even so, only a little over a third of Americans have individual life insurance policies according to the 2021 Insurance Barometer Study by LIMRA.

There are a couple reasons for that.

First, many employees don't realize that they may need an individual life insurance policy.

Many think, "I've got life insurance through my workplace, so I'm fine." But, considering the low coverage levels of group life insurance, and the fact that these policies are not portable, employees need to think more carefully about making sure their families are provided for.

Second, not everyone can or wants to go to the trouble to get approval for individual life insurance policies.

If workers have to go through the inconvenience of getting physical exams or statements from their physicians, employees are much less likely to pursue individual insurance.

Embracing the Future

In an ideal world, employees would have easy access to both individual and group-based life insurance plans.

Group-based plans would ensure that even individuals with health issues or extremely low incomes could still get some coverage.

And since individual policies allow employees to increase coverage while paying directly out of pocket, individual life insurance removes the administrative burden of the special payroll deductions needed for supplemental life insurance through an employer.

But for all that to happen, some things need to change.

First, employers need to be willing to educate employees.

For instance, many employees aren't aware that their insurance isn't portable.

Others may not be aware of how the low coverage generally offered through the workplace measures up compared to the coverage necessary to make a family financially secure.

Bob Gaydos, is the CEO and founder of Pendella, a company that offers a digital life insurance and disability insurance shopping system designed for professional employer organizations.