Open enrollment tip: Don't just go with the group life insurance, get individual as well

You can’t take it with you — that is, your group life insurance coverage.

There's a common misunderstanding among employees that they can take company-sponsored insurance coverage with them when they leave a job. Unfortunately, in most cases, the group life insurance policy is not portable, leaving the employee lacking quality life insurance protection.

Meanwhile, procuring an individual life insurance policy after leaving a job or upon retirement is often a difficult task if an individual’s health condition has changed at any point during their previous employment.

InvestmentNews caught up with Bob Gaydos, CEO of technology-based insurance provider Pendella, to find out why individual life insurance — in addition to group life — should be a focus for employees, especially with open enrollment season just around the corner.

InvestmentNews: Why is individual life insurance necessary on top of group coverage from an employer?

Bob Gaydos: An individual life insurance policy is owned by the employee and can be purchased from a variety of carriers. Meanwhile, group life insurance is a single carrier policy owned by the employer, and the employee is only covered under a certificate. Typically, employers will purchase a small amount of group life insurance for the employee, for example $50,000, and allow the employee to purchase additional group life insurance. This coverage is significantly inadequate.

There may also be coverage limitations on the additional group life insurance purchased, such as a $300,000 limit, or spousal coverage limits, like a spouse can only purchase 50% of the employee’s coverage. This is also inadequate since a family of four with two school-age children may in fact have a need for $1 million on each parent.

Furthermore, the group life coverage is generally subject to actively 'at work' provisions. And group life insurance is not portable and in fact is cancellable. That said, the coverage may be convertible, however, at very high costs.

Individual life insurance, on the other hand, solves these issues since the policy is owned and retained after employment by the employee, who can purchase up to $2.5 million in coverage. The policy can also be for a 10-to-30-year level term or even permanent life insurance. And finally, the employee can qualify for the best rates from competitive carriers.

IN: How does individual life insurance fit into an overall retirement plan?

BG: Most people have a need for both term insurance and permanent insurance since some financial risks are defined, like a mortgage, and some financial risks, such as spousal support, are long term. In many cases, individuals should have permanent life insurance that is also a long-term, tax-deferred savings vehicle that can supplement other long-term savings vehicles like a 401(k). Also, it’s worth remembering that the asset value of the life insurance policy offsets the costs of financial protection.

IN: What are the different types of individual life insurance plans offered and how should one choose the correct one?

BG: Employers should offer three basic individual life insurance plans: level term, decreasing term and a simple permanent life insurance offering, either whole life or universal life insurance. This allows enough choice to cover the various needs based on their demographics and health status.

IN: How do you know the 'Goldilocks' amount of coverage — not too little, not too much?

BG: The key is a simple calculation. Life insurance basically protects the costs of four risks: burial, debts, spousal support and child support. You may not have all four needs.

Most individuals underestimate their life insurance needs. It's easy to understand the amounts to cover burial or debts. It is much harder to estimate the needs to cover spousal and child support. But there are simple calculators to help. Often you read that life insurance coverage should be six to 10 times your annual income. That is a good way to quickly understand the need and relative amount.

IN: What should employers know about life insurance going into open enrollment season? What about employees?

BG: Most importantly, new life insurance plans are now available that are extremely convenient for the employee. New products are underwritten instantly using big data. This allows an employer to provide access to individual life without the long process of medical exams or attending physician statements.

Additionally, the employer can offer these plans year-round since they are individual policies and not tied to the employer group open enrollment. They can be placed inside the online experience of benefits, payroll and HR — before, during and after open enrollment.

Lastly, employees can pay for these new plans directly via bank draft or credit card. This is convenient for the employee and prevents burdensome administration and reconciliation for the employer. This is a leap forward. These innovations allow the employer to easily add individual life insurance to their benefit offerings. All this means better coverage for the employee and it’s what we do at Pendella.