Buying Life Insurance from Your Employer

Consumer Reports discusses the ins and outs of buying life insurance from your employer (over and above what you might get from them for free). In particular, they make this important comment:

Advisers warn against having employer-provided insurance serve as your basic policy for family protection. "If a group policy can't be converted to individual coverage when you leave the company, it could be disastrous, especially if you have medical issues," says Ginny Stanley, a principal at REDW Stanley Financial Advisors in Albuquerque.

True. You'd hate to have to leave an employer, lose your insurance and not be able to get new coverage elsewhere.

Another issue is price -- especially if you are younger. In my earlier employment days, my company's policy was actually more expensive for me than what I could buy outside the company (my current company doesn't have life insurance coverage so I buy outside, of course.) So I always went outside. I don't think many people checked on the price options. They assumed that the company insurance was cheaper because they got "group rates". But inside almost any group there are always some bad risks, which raises the average cost. If you're younger and healthy, you can likely do better price-wise (plus have a policy that sticks with you in case you change employers.)

Comments

[GenYRetireRich]

One thing to stress is that you don't even need life insurance until you have children.

[mamacita]

What's the consensus on buying the life insurance offered by your credit union?

[Darin H]

We get good rates with my wife's life insurance benefit at her employer, plus the money we pay the premiums with is pre-tax. We just signed up for some this year since we are having a baby in Jan.

[bb]

I'd like to add my 2 cents about the theory that "you don't even need life insurance until you have children."

As time goes on, life insurance gets more expensive. So, if you plan on having children in the future, it may be to your benefit to get life insurance as soon as possible. You may even get it because you are married.

But this doesn't mean that life insurance doesn't have a place in your plan if you aren't married or a parent. Life insurance protects your human life value. It replaces your lost production in case you die. Many only look to life insurance for the death benefit. We use whole life insurance because it provides living benefits...many that we take advantage of today.

[J]

Sorry GenY but you are misleading people with your comment. There are many reasons to have life insurance that would lead someone to need it even if they don't have children. While children might be the main reason, it isn't the only one. Life insurance planning is much more complex than most make it out to be and you need to consider issues like bb brings up.

[Jim]

What are some of the many reasons to buy life insurance if you are single with no dependents?

I'm not really seeing a need for insurance if you've got nobody depending on you to provide for them.

Locking in a cheap rate now might be one reason, but rates don't increase that drastically between age 25 and 40. And if you sign up for a term policy then youll be insuring years you don't really need which would require a longer policy which costs more. e.g. If you're 25 years old now and expect to have kids when you're 30 then buying a 25 year term policy now would cost $300 a year. Or you could wait till you actually have kids at age 30 and pay $250 for a 20 year term policy.

Jim

[J]

If you are single it doesn't make much sense, but married couples without children could very well need some life insurance. If you have very different incomes between partners you might want to insure that one can maintain the lifestyle or pay off debts if something happened to the main breadwinner. There are also very good tax/estate planning reasons to get whole life insurance that are the same with or without kids. While it might not be as necessary, a blanket statement like GenY made that no one needs life insurance if they don't have kids is wrong.

[Sandra]

Do you have any life insurance companies you can recommend? I'm a SAHM and wanting to get some for us asap .. but can't make my mind up on who to go with ... any suggestions???

[Apex]

Darin H,

I am not sure if you realize it but because you buy your life insurance with pre-tax dollars the IRS considers the value of the policy above 50K to be provided by your employer. As a result the value of the coverage above 50K is added to your taxable compensation as imputed income.

So with the exception of the first 50K I don't think you are getting any benefit by paying for it with pretax dollars.

[Apex]

As seen above people get pretty religious about term only and only when you need it versus whole life and insurance for life philosophies.

I come down strongly on the term and only when you need it side of the equation. I have listened to many various arguments and understand that there are points to be made on the whole life side and I am always willing to hear a new one that changes my mind but thus far I can't see how I am not paying a huge subsidy to get less insurance than I probably need in exchange for locking up my money for decades before it returns the type of benefits promised by whole life policies.

I used to have one that I was able to get out because Prudential was sued for false sales tactics and I had it for 9 years. Its increasae in policy value in 9 years was certainly nothing to brag about. I was 19 when I took it out and was paying 470/year for 50K coverage. (I now have a 20 year level term taken out at age 34 that costs 400/year and gives me 750K of coverage and I can't afford to be paying the about 8000/year it would take to get whole life worth that much.)

My father-in-law is a life insurance agent and he pushes whole life almost exclusively because that is where all the money is and he has said the commissions on term are hardly worth the time. He gets commission on these policies every year you hold them and the real kicker is that agents typically get paid 110% of the first year premium as a commision. So if the agent gets 110% of the first year premium and a percent every year after that and the company has to make profit and still pay out death benefits when someone dies prematurely, how much do you think is left to "grow" your worth as is promised. Not nearly enough. They cannot make up for these huge fee structures enough to make the policy a decision that is going to give you a good return on your money. The fees on whole life appear to me to be worse than the fees on a front load mutual fund. How can you ever recover from losing 110% of the first year "investment" and high fees every year after that in this insurance for life strategy.

Every argument I have heard about saving taxes, borrowing against the policy, dealing with estate issues, etc, seems to me to be a benefit that can be achieved better and cheaper in other ways.

Those are my reasons. But I understand that others see it differently which is fine. I have examined it enough to feel comfortable that I have made the correct decision for my family given what I know about the choices.

[Tarah]

Mamacita: Usually if you buy life insurance through a bank or credit union, the beneficiary is the bank or credit union, not your family. If that's not so with your particular credit union, you'll have to compare rates and see if it's a good idea.

Apex: I want to know what company pays 110% commission on the first year's "investment." Most companies I'm familiar with are under 50%.

I'm personally convinced that everyone needs a whole life burial policy, including children. I've seen what happens to families when someone doesn't have life insurance. It doesn't matter if the person who died has assets, they go through probate and get tied up in the court systems for up to three years. While that money is tied up in probate, the family gets charged the $10,000 for the funeral, and the state will call family all the way out to third cousins until they can find the money.

If you need anything besides a burial policy, get term insurance, unless you plan on using anything extra for estate taxes or to make up for your income for your spouse, then it should be whole life.

[Kevin M]

Whatever you do - don't buy life insurance through your mortgage company or bank. They'll be the beneficiary and it will just be used to pay off your debt. And make sure to actually read the policy!

[Apex]

Tarah,

I think it might have been state farm that paid 110% (or so I was told by a state farm agent).

But for this article claims its 90-95% for typical whole life. So 90, 110 .... I don't think it really matters do you? I can't see any place claiming its under 50. So now that I have backed up my numbers, where do you come up with under 50?

http://personalinsure.about.com/od/life/f/lifefaq3.htm

The key excerpt from the above article is:

"So, depending on the type of insurance you choose, the commissions can vary. Although every company is different, on average life insurance agents make about a 30-50% commission on term life insurance and around 90-95% commission on whole life products. Keep in mind that this is the first year commission on the premium and subsequent year commissions are much lower with an average of 6% per year for whole life products and 4% per year on term life insurance products. Some life insurance agents may also get a one time fee commission on top of the above commission just for starting a new life insurance policy. "

And you will notice the last sentence about getting a one time fee commission for starting a new life insurance policy. You add that to the 90-95% and you might get to 110%.

[Tim]

I recently just went through the exercize of purchasing more term life insurance on top of my employer and another outside policy. Money magazine recommends Insure.com, and Dave Ramsey recommends Zander.com to compare all the different options. I was concerned about giving out all my information and getting bombed with spam from all the vendors, so I created a Hotmail account just for this and went at it. Both tools were excellent, and I only got contacted by the sites themselves and the vendors I selected. Both had the same rates and policies, and you could adjust up and down the different coverages to see what was worth it for your particular situation. I actually purchased through Insure.com, and had good results with them. It was much better than dealing with a slimy salesperson trying to push fat commission products that did me no good. And it saved me about 30% over what the sales people were quoting.

Both tools also gave quotes for disability insurance, but that is a much harder process.

[Jim]

Tara said : "I'm personally convinced that everyone needs a whole life burial policy, including children. I've seen what happens to families when someone doesn't have life insurance. It doesn't matter if the person who died has assets, they go through probate and get tied up in the court..."

If you have no assets then a small life insurance policy to cover a funeral could be a good idea. But then if you have no assets then it might be hard to come up with cash to pay for funeral insurance. Kind of a catch 22 there.

If you have assets then there are various ways to avoid problems with paying for the funeral. You can prepay for the funeral directly, you can setup a bank account with payable on death designation, you can setup a living trust, and I'm sure theres other methods.

Jim

[Apex]

If anyone is interesting in comparing policies and terms of various life insurance options from tons of different (many top rated) companies its hard to beat http://www.term4sale.com

You don't have to put in any personal info or get contacted. You just put in your age and rate your policy health (preferred/regular, smoker/non) and presto, tons of quotes from tons of providers.

Anyone who wants to know what it would cost to get various different levels of term should check it out.

They don't seel insurance so you will need to find your own agent/broker/or provider but it lets you see what is out there and easily compare.

[Tarah]

Apex:
My source is commission schedules from Mutual of Omaha, Northwestern Mutual, Bankers Life and Casualty Company, and Allianze. About a year ago I was looking for a job and these companies tried to recruit me. They gave me the commission schedules in the recruiting packets. The most I saw from any of them was 60% (for Universal Life), some of the whole lifes were at 50%, and most of the commissions were under that. Usually term was the same as whole life for percentages because the companies wanted to encourage the agents to make decisions on what was good for the client as opposed to what was the best commission.

[GenYRetireRich]

I'm guessing that those who think my earlier comment is wrong are life insurance salespeople. Hey, guess what? I had a life and health license for a very long time and ran a small agency. Now I'm retired.

What I know for a fact is that insurance companies make money selling life insurance policies. They set the odds in their favor, so that they win most of the time. Sure, they make plenty of payouts, so do the Vegas Casinos. But just like Vegas. as long as enough people are playing, the life insurance companies are going to win over the long haul.

That being said, I think life insurance is essential to protect your children until they are about 22. But if you don't have kids, in general, the odds are against you if you buy a policy. Therefore, it's not necessary.

Please don't tell me all the specific areas where life insurance is important. Just disprove my assertion that the life insurance companies make money by selling life insurance. If you can disprove this, then I will agree that everyone should own multiple policies.

[Apex]

Tarah,

That is interesting information. So if I was told firsthand by an agent that they were getting 110% and the article I pointed to said 90-95 was common, but you have seen 4 companies paying 50 and then I searched the internet and found a few commission schedules, some at 95 some at 50, that means there is a wide disparity in commission paid.

That means in order to determine on a whole life policy if your funds have any chance to grow you really need to know the details of these commission schedules. I still am not attracted to whole life but if one policy is giving the sales person 95% of year 1 and 6% after that and another is giving them 50% of year 1 and 3% after that, that makes a huge difference.

Aside from that another thing for people to think about with whole life. I have two term policies on myself and my wife with GenWorth Financial. They are a top rated insurer. Today they just announced that they have purchased a small community bank in Maple Grove Minnesota. They intend to use this to petition the government to reclassify themselves as a bank to qualify for the government TARP bailout package. In the last quarter they lost 250 million due to investments in bad mortgages and the whole company is now worth only 600 million with a stock price of $1 down from $30 in January.

If they go bankrupt I am not quite familiar enough with the require reserve funds as to how secure my policies are but since they are term if they are not secure I will just go get a new one. If they were whole life and they were not secure, I would be totally screwed and out my money. I understand that the reserve insurance funds and reserve requirements put on the insurance companies help protect against this but I can tell you that if a large portion of the insurers go down at once, these reserve funds are not going to hold and lots of insurance money in insurance policies is going to be lost.

This is yet another reason I would not be comfortable tie-ing up 100's of thousands of dollars in whole life as an investment and tax plan. There is no portability in these things and if the company that you are with goes down you can end up being out. GenWorth Financial should definatley not be needing a bailout. Hartford Financial just did the exact same buying of a bank and plans to do the same thing. These are huge highly rated insurers. They should not go down, yet they are seeking bailout money.

I would think carefully about such scenarios when choosing whether to pay the huge sums of money demanded by whole life that is supposedly stored away safely in these policies for you. None of this is supposed to happen, but busts do occur and when they do, things that you thought were 100% safe investments can turn out to be 0% safe.

[bb]

GenYRetireRich,

I'm not an insurance salesperson. And I'm not going to attempt to disprove "that the life insurance companies make money by selling life insurance." I know this and still have bought multiple whole life insurance policies. I don't mind my agent getting commissions equal up to 1 year in premium payments. He's provides value to me and I pay him for it. Do you find it ironic that people will pay 15%-20% for bad restaurant service but hesitate to pay their agents and brokers?

The way I look at it, I'm building a business...my banking business. The cost of the insurance goes to building that business. If you understand how to use your whole life policies as a personal bank, then you will never have to finance anything through a financial institution ever again.

My point is, just because something is expensive, or highly commissioned, doesn't mean that it's not good. Investing is never in the product...it's in the plan. If someone asked me if I would want Tiger Woods' clubs or his swing, I'd take his swing every day of the week and twice on Sunday. The value is in the ability to utilize a financial product to its fullest potential.

[Tarah]

People who buy any kind of insurance are safe from any issues with the company they buy it from because the company is required by law to match dollar-for-dollar what they insure people for. If the insurance company embezeles the money, each policy is insured by the state for up to $100,000 (unfortunately, that didn't go up with the bank bailout).

[J]

GenY that makes no sense. So you are saying we should never purchase a product or do business with someone who makes money off of us? I shouldn't get a checking account then b/c the bank makes money on that? I shouldn't invest in the stock market b/c either a broker or mutual fund or trader is making money off of me? Your logic is faulty. Somebody is making money on almost everything we do in life. You have to balance the cost of the transaction with the benefit you receive. For some people life insurance policies provide a benefit that is greater than the cost or the cost of other alternatives, whether it be in terms of tax or risk mitigation. Sure for the vast majority of people life insurance without kids may not make sense, but your blanket statement is misleading.

[Apex]

Tarah,

I am not sure exactly what you are saying but if you are saying that if I take out a 1 million dollar life policy the company has to immediately put 1 million dollars into some kind of a reserve fund this is mathematically impossible. Life insurance companies have people insured for 10s or 100s of times more money than all the money they are worth. The whole idea of insurance is to spread risk. If all policies were fully backed by real money then the quality of the company that issues the policy would be irrelevant. I might as well buy the cheapest policy with a B- rated company. But we know this is not true. The financial strength of the company most certainly does matter. If that company goes broke (Look into Conseco) policy holders most certainly can and do end up having policies that are worthless or worth very much less than what they were before.