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Should I get life insurance if I’m covered through work?

by Mark Cluett
10 min read

Almost 39% of life insurance owned by Canadians is through group term insurance. With such a large number of Canadians under the impression that they are covered for whatever life throws at them, it’s no wonder they don’t know the intricacies of their group term insurance versus individual term life insurance.

It’s a good feeling knowing that you’re protected – whether by group life insurance paid for by your employer or perhaps coverage through a group or professional association you belong to. Because of this, you might assume – as many people in your situation often do – that you don’t need to look into any other insurance options. However, there are many scenarios where group life coverage from employee benefit plans falls short for Canadians when they need it most.

Life insurance ownership and premiums

What is group life insurance?

Group life insurance is a single master insurance contract designed to cover a particular group of people, such as those who work for the same company or who belong to the same professional organization. The plan is owned by the plan sponsor – which is usually the employer or the professional organization – and offers life insurance coverage to the members of the group. The coverage provides a death benefit to the family of the employee or plan member if they pass away while being a member of the plan. The benefit is typically based on a multiple of the plan member’s earnings.

Do I need group life insurance?

Group life insurance is generally provided as part of an overall employee benefits package in order to attract and retain talent. So if you are offered group life insurance through your employer or another group, we would recommend that you sign up for it, especially if your personal life insurance coverage is inadequate.

What type of life insurance do employers offer as a group benefit?

Group term life insurance is the most common form of group life insurance although other types of permanent life insurance are also sometimes offered. Group term life insurance death benefits can be offered as a flat amount, as a multiple of an employee’s annual salary (such as one or two times your annual salary), or a mix of both. Some employers also sponsor optional and dependent life insurance, which provide additional coverage and greater flexibility to the employee.

Do employers pay for group term life insurance?

Most employers will pay for a substantial if not entire portion of the premiums for group life insurance. The only thing to note: the coverage offered is typically basic – so basically without any customization or riders built in. The cost of additional supplementary coverage is usually paid for by the employee.

Are all employers required to offer life insurance as an employee benefit?

Offering group life insurance is completely optional for employers. However many will offer it to attract and retain talent while also helping employees benefit from the lower rates of insuring through a group.

Save on life insurance

What are the benefits of group life insurance?

There are a number of benefits of group life insurance that make it an attractive option for those who are offered it through work or a professional association.

Affordability
An employer often pays for most – if not all – of the premium so there is very little or no cost to the member of the plan. If you do need to pay a portion of the premiums, they are usually less expensive because the insurance company prices it on the basis of the underlying risk profile of the group as a whole rather than as an individual insurance applicant.

Convenience
It’s easy and convenient to sign up with only a small amount of paperwork and no individual underwriting. The payments are usually through payroll deduction, so no worries about policy lapsing because you missed on your premium payments.

Limited underwriting
Most group term life contracts do not require any medical exam to be administered on the individual plan members. Members may be automatically or voluntarily enrolled in the overall group life insurance plan. However, an eligible employee may be required to go through medical underwriting, to establish good health in special circumstances such as when seeking an amount higher than the group coverage or when trying to rejoin the plan, after initially declining coverage.

What are the disadvantages of group life insurance?

Limited coverage
The group benefit amount is generally limited in coverage and is likely to be inadequate for your or your household’s needs. Try out our life insurance calculator to see how much life insurance you may need and compare it to your group plan, to establish whether it’s adequate.

Lack of control
Another disadvantage is that the plan sponsors (i.e. the employer or the organization) or even the insurance company can change the plan anytime they choose or even discontinue it altogether. Because you are sharing a plan among others in a group, it cannot be tailored to meet your own unique needs.

Limited Portability
Group life insurance is dependent on an individual’s affiliation with the group. Just because one particular job includes insurance, there’s no guarantee that the next one will. If you find yourself in a position where you need to purchase life insurance once you make a career change, your premiums are likely to be much higher by then as you are a little older and more expensive to insure from an underwriting perspective. When you retire, you may also lose coverage.

Taxation
Lastly, depending on how your employer structured the benefit fees, you might need to pay taxes on the payout.

What happens to my group life insurance coverage if I leave my employer?

Employer-offered life coverage is linked to your employment i.e. it covers you and your dependents, until your employment period ends, whether terminated by you or by the employer. Many employer-offered plans include an option to convert the group coverage to an individual policy, upon leaving the employer. However, the cost of conversion from group to individual coverage is significantly higher and most people tend to get new individual coverage at that time. Typically, only those individuals who may have pre-existing health conditions, and may find it hard to get individual coverage based on a medical exam, will take advantage of this conversion option.

Does group life insurance end at retirement?

Group life insurance is dependent on your continued employment; therefore, at retirement, your group life insurance also expires. However, as mentioned above, you will typically have the ability to convert the group plan into individual coverage, without providing any evidence of good health. The conversion has to be requested within a limited period of time, usually 31 days. The conversion option is much more expensive since no evidence of good health is provided.

Are my dependents covered through employer life insurance?

Most employer-offered life insurance plans will allow an employee to extend coverage to also include their dependents, such as married or common-law spouse and dependent children up to a certain age, such as 21 years.

Is company-paid life insurance taxable in Canada?

Employer-paid life insurance policies are considered a taxable benefit. These amounts are reported on your T4 slip and reported on your tax return as a taxable benefit.

Insurance for newlyweds

Do I need individual term life insurance if I am covered through work?

Being able to tap into the employee coverage in Canada is a great advantage when it comes to the first steps of protecting your loved ones should something unexpected happen to you. If you decide to leave that job for another one though, you’ll probably find that the cost of finding life insurance alternatives at that point in your life is much more expensive.

If you’re offered group life insurance, of course you should take the maximum that you’re entitled to – at the end of the day it’s free (or almost free coverage). However, you should strongly consider purchasing supplementary individual term life insurance. It gives you a choice in your coverage, it provides you with more control over your benefit amount, and it futureproofs your protection options.

What is individual term life insurance?

Individual term life insurance is a contract between you and the insurance company – instead of getting life insurance through a group plan, an individual can purchase life insurance for themselves. It’s portable, in that individual term life insurance isn’t tied to a particular employer, group, or organization – so it stays with you until you decide to cancel it. You’ll know what your premium rate is before you sign a contract and the insurance company can’t change it during the term. It’s also guaranteed, so the insurance company can’t cancel the insurance should you say, contract a terminal or critical illness down the road. Only you are able to do so. Most importantly, unlike group life insurance, individual term life insurance can be tailored to your specific needs.

For more on exactly how term life insurance works, read our full coverage here.

The bottom line

Term life insurance provides the best and most comprehensive benefits for your loved ones and estate. As the reasons above outline, life insurance through group benefits, while great when you have them, is not a guarantee. For true coverage that transcends your current job and matches the flexibility you might need as your career evolves, term life insurance is the simplest answer.

Read the honest guide to life insurance for more information about how individual life insurance works and try out our Life Insurance Calculator to see how much term life insurance you need.

Or book some time with our advisors

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