Even though this isn’t my primary market, I can’t stop thinking and writing about association and group term. These mundane policies don’t have the panache of other insurance, aren’t involved in advanced markets strategies, and are small potatoes in terms of death benefits and premiums, yet they’re stuck in my craw.
Within a week of writing another recent piece on this topic, I was on the phone with a family friend who will soon be a widow. My mother asked me to call her to answer a few life insurance questions she had, and I was glad to do so.
Here’s the story. Last year, at age 65, her husband retired from his job as a minister. As part of his benefits package, he could participate in the group insurance program, and he did so years ago to the tune of a modest $250,000 term policy.
Coincident with retiring, he was diagnosed with inoperable and terminal brain cancer. He’ll be gone by year’s end, and the insurance isn’t in force.
Group vs. Individual Term
Let’s look at his group insurance. I visited the benefits website and verified all of the numbers she’d shared with me. I could also see what the premiums for the insurance would be at various ages over the years. It was demoralizing.
This gentleman, 20 years ago, could have purchased a 20-year guaranteed level term policy on the open market for significantly less than his group plan. Additionally, the group plan premium would increase by 50% to 100% every five years while a market-based plan would have stayed level for the full 20 years. The group term insurance premium would grow to over 10 times the individual term pricing. This is a colossal waste of money for someone who was otherwise insurable at a very favorable rate, preferred best in fact.
Why does this happen? Lack of knowledge, expediency and conventional wisdom. He didn’t know any better, it was easy, and this is what people do, right?
The ridiculous annual premiums were bad enough, but they’re not what precipitated the tragedy. Most association and group insurance programs have restrictions, one being that you can participate only if you’re a part of the club, meaning you maintain your employment with the company or your affiliation with the association. You go, you’re cut off.
There’s an alternative. If your client leaves, he can convert his policy to a permanent, cash value contract. However, the products offered for conversion are the worst of the worst available. In some situations, these are uncompetitive products made available only for conversion from association and group term programs, and they’re outrageously expensive.
Of course, it has to be this way because most group and association term isn’t underwritten rigorously, if at all. If everyone can get it, then it has to be priced expensively. The only people converting are those who can’t get anything on the open market because they’re no longer insurable on a favorable basis.
The same insurance company backing the group or association plan has modern and competitively priced products available for others to convert to, but these policies are off-limits for group and association plan participants to convert to.
Just how bad is it? If my family friend had gone to the market to buy an underwritten policy, when he retired, he could’ve kept his policy as a term contract through the end of the 20-year period. There would’ve been no need to convert it to a more expensive policy unless his life expectancy exceeded the duration of the policy or at least the conversion period for the policy.
Let’s assume he did need and wanted to convert it. The premium to fund a competitive, individual permanent policy for life would have been $4,500/year, and he likely would’ve funded much lower, perhaps half of that or less, because he knew he wouldn’t be celebrating advanced-age birthdays due to the tumor. What do you think his group term conversion premium was? Over $30,000/year! That’s right, multiples of what could have been available. Probably a 1,000% increase over what could have otherwise been if he’d known. Besides, with the level term policy, he wouldn’t have even needed to convert in the first place because he had years left of low, level premiums that he wasn’t going to outlive. He just needed to keep paying his $500 annual premium!
Because he had to convert to maintain the coverage and because it was $30,000/year, he chose not to. With no disrespect to his doctors, they offered an optimistic estimate of his time left, and it wasn’t clear-cut that it would be a good use of money. In reality, it turns out almost no one with his diagnosis lives very long, and the one or two premiums would have resulted in significant leverage and offered options to his wife and family.
When Group Term Is Appropriate
Let me be clear, if association or group term is the only life insurance available to your client, then by all means, he should take advantage of it. Also, any amount of insurance offered as a benefit your client doesn’t need to pay for should be taken advantage of, but your client shouldn’t count on that coverage. If your client is offered $100,000 and needs $250,000, he should not only not buy $150,000 through the voluntary group offering but also not even buy $150,000 in the market. He should buy the $250,000 in the market he actually needs. If your client loses or leaves his job because he’s sick, the very moment he can’t qualify for an individual policy is probably when he can least afford to pay for the obnoxiously expensive group term conversion. He needs the $250,000 at the cheap and level term rates for an extended period of time.
I realize I’m beating this to death, but it’s not like I’m suggesting to pay more for a better benefit. Unless your client is uninsurable, needle phobic or so lazy that he won’t do something this easy to save money and protect his family, he’s simply flushing money down the crapper for group term insurance.
Individual Coverage to the Rescue
It turns out that my parents sent this couple to me 12 years ago, and we put in force $250,000 20-year term policies on each of them at the best preferred rates. Unfortunately, from a personal perspective, I’ll be delivering a death benefit check in the coming months. But fortunately, from a professional perspective, I’ll be able to help someone after their corporate benefits program failed them miserably.
This particular widow will be fine. After all, her husband retired confident they had enough to do so, and she does at least have one of the $250,000 checks coming. Not everyone will be so fortunate. However, she really wanted to be able to help the grandkids with college education and create a scholarship in her husband’s name, and now she won’t be able to.
Bill Boersma is a CLU, AEP and LIC. More information can be found at www.oc-lic.com, www.BillBoersmaOnLifeInsurance.info and www.XpertLifeInsAdvice.com or email at [email protected]