Advisors Blog

WHAT ADVISORS SHOULD KNOW ABOUT GROUP TERM VS. INDIVIDUAL CONTRACTS

In this installment of "Quick Sales Ideas to Generate Revenue," we discuss 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 “portable” 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:

• An employee is age 65 and is insured for 1,000,000 of group term life.
• Under IRC Section 79, there are no tax consequences to the first $50,000 of coverage provided by an employer.
• However, the remaining cost of coverage in excess of $50,000 must be reported as taxable income using the IRC Table I charges.
• The IRC Table I charge for ages 65-69 is $15.24 per thousand.
• With the remaining $950,000 taxed at $15.24 per thousand - the employee will have a reportable taxable income of $14,478.

The true cost for this “FREE” benefit is about over $5,730 assuming the highest federal income tax bracket. Depending on state of residence, state income tax could add even more to the cost of owning coverage.

THE SOLUTION:

We suggest the client purchase a $950,000, 10 year term contract with a guaranteed premium of $5,290 (assuming PNS for a male, age 65 with Cincinnati Life). Benefits will include:

• Lower out of pocket cost.
• 10-year rate guarantee lock-in.
• Greater flexibility.
• New policy is both portable and convertible (to a more competitive product than group term conversion policy).

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.