Group Term Insurance vs. Individual contracts and how to save your clients' money and offer more flexibility.
Did you know employer-sponsored group term life goes up in premium every five years, and part of the premium paid by the employer may be taxable to the employee? Group insurance is a convenient low-cost way to get coverage with no underwriting and little hassle, but at older ages there may be better solutions. If you have clients approaching 65 years or older, you may want to discuss replacing their group term life insurance with an individual term plan for 10 years or longer (assuming favorable underwriting).
THE PROBLEM:
1. Group term rates are tiered into 5-year segments, so they increase for your clients every 5 years, and at older ages those rate increases can be substantial.
2. Coverage amounts often fall sharply at older ages, it is not uncommon to lose half or three-quarters of the coverage as the client reaches age 65 or older. Just when the client needs the coverage and is nearing retirement, their coverage may shrink.
3. Group plans are somewhat acceptable in that they can be converted to permanent coverage upon separation or retirement, but those conversion products are usually not competitive and the employee has a very limited time to make the election.
4. Although the client is often not paying the cost themselves, they are still TAXED for the benefits received. As the cost increases, the taxes due increase to the point where they may exceed the premium for a comparable plan (see example below).
EXAMPLE:
Upon reaching age 60, an insured individual in a group life program will start to incur very significant reportable income under the Uniform Premium Table. This is the measure of the economic benefit that the group life policy provides to the individual insured and must be reported on their tax return. At younger ages this reportable income is not that significant and increases in 5 year segments. However, starting at attained age 60, this changes dramatically:
- Age 60-64, $7.92 per thousand.
- Age 65-69, $15.24 per thousand.
- Age 70+, $24.72 per thousand.
The following is a case study of two senior executives, age 66 and age 70 both of whom have $1,000,000 of group life.
THE SOLUTION:
We suggest the client reduce their group life benefit to $50,000 (benefit is tax free), and replace the $950,000 lost benefit with an individual 10 year term policy.
- Client age 66, cost for $950,000 of 10-year term is $5,765.30 guaranteed for 10 years. His previous reportable income was $14,478 with an actual tax cost of $5,791,20 (combined federal and state tax rate of 40%). Note: at age 70 his reportable income will increase to $23,484.
- Client age 70, cost for $950,000 of 10-year term is $9,005 guaranteed for 10 years. His previous reportable income was $23,484 with an actual tax cost of $9,393.60 (combined federal & state tax rate of 40%).
ACTION PLAN:
Talk to your clients nearing age 60 - 70 who have group benefit packages and ask to see information on their group life plans. If you believe they are insurable, send details to your GBS brokerage director and we'll prepare quotes and an analysis of their options.
*Keep in mind that most life insurance policies require health underwriting and, in some cases, financial underwriting. Each case is individually underwritten as the severity of medical conditions varies among individuals. Formal underwriting evaluation and pricing is based on the individual characteristics of each case.
