Your employer-provided life insurance, health insurance and other benefits can be worth thousands of dollars in additional (very often, tax-free) value each year. These benefits help protect your financial security and that of your family. But it can be a dangerous oversight to rely too heavily on employer-sponsored plans. Even a quality benefit package may contain gaps that could leave you and your family exposed to serious financial risk.
The Benefits of Benefits
Employer-sponsored benefits whether your employer pays all, none or some of the cost offer a number of advantages:
- Low group rates on insurance in comparison to similar individual plans. In general, because of the high volume and lower overhead of administration, group rates rank among the lowest available. In this respect, even if you pay all or a portion of your own benefits, the probability is high that you are paying an excellent rate.
- Group underwriting. Once standards are established for the group in general, underwriting requirements per individual are very often less stringent than for individual plans. Based on a number of group factors, including plan limits and amounts, very often just a medical questionnaire is required for approval rather than a full medical exam. Many people not considered to be insurable under individual underwriting requirements are covered through their group plans... providing them with insurance they might not otherwise be able to obtain.
- Protection against termination. Under the provisions of the master policy, coverage for an individual generally cannot be canceled once it has been issued, regardless of the employee's state of health. Generally, as long as you remain within the company, coverage will be continued. Most of all, rates cannot be increased on an individual basis. They can only be increased when rates for the entire group are raised. (The master policy, however, can be canceled by either the insurer or your employer at any renewal date.)
- Conversion privilege. Upon termination, members of the group can convert their coverage to an individual plan without the need to provide evidence of insurability. This feature protects an individual's insurability... regardless of current health status. Additionally, if the master policy is terminated, replacement coverage will generally be made available to all insureds.
- Possible tax advantages. Under current law, if your employer pays for all or a portion of your benefits, the value of the coverage is not considered to be taxable compensation in many instances. This applies to medical insurance and to life coverage up to certain limits. In short, you receive this benefit tax free.
The bottom line is that employer-sponsored plans provide valuable insurance and other benefits, very often at a savings of thousands of dollars over what you would pay to provide them for yourself.
Employer-sponsored plans are generally a good deal for the employee. But they have a few serious drawbacks that need to be considered when reviewing your own financial security needs. These drawbacks include:
- Coverage is not based on your individual needs. Employer-sponsored plans tend to be off-the-rack in design. The benefits you receive may have little in common with your actual needs and situation.
- Minimum protection amounts. Benefits are often designed to provide basic protection or benefits. Amounts are often limited... such as to one or two times salary for life insurance or two-year maximum benefit period for disability income coverage. Such plans, by themselves, could leave your benefit package woefully inadequate.
- Costs generally increase on an age-based, step-rated schedule. Especially at older ages, rates can increase dramatically. If you fund your own benefits, you may not be able to afford to continue them as you approach retirement.
- Benefits may not be portable. If you leave the company, the business closes or the master policy is canceled, your benefits cannot be continued. Yes, you have the option to convert your coverage to an individual plan, but the cost at some ages can be prohibitive.
- Coverage often terminates without benefit at retirement age... the very time when life insurance and health insurance are often needed most.
- Your employer can terminate the plan at any time. Due to the turbulent economic times in which we live, this is an option that has been exercised more and more frequently in recent years, as employers try to cut costs.
Perhaps the biggest risk to employees is that employer-sponsored benefits can create a false sense of security. Minimum benefits, contingent on employment, provide a valuable safety net for millions of workers in this country. But they are a starting point not the final word when it comes to protecting yourself and your family.
Recommendation: Take full advantage of your employer-sponsored benefit package. You will probably never find less expensive coverage. At the same time, be aware of the drawbacks of such plans. Therefore, New York Life recommends that you view these benefits as a supplement to your individually owned programs.
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