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Supplemental life insurance: should you buy?

When employers were still mostly human, they offered their employees a range of benefits in addition to pay. One of the more common add-ons was a group life plan. The general idea was to provide for the employees' welfare through health, retirement and life cover, and so encourage them to greater effort. The advantage from the employer's point of view was that it was usually cheaper to buy the various benefits in bulk than to add pay sufficient for the employees to buy as individuals. Since pay was low, it avoided struggles for the employees to buy their own benefits. Everyone was happy with this arrangement. As we move toward the end of the last century, this philosophy was retained in the public sector, but more greedy capitalists began chipping away at the benefits. As unemployment rose, there was always a good supply of labor queuing up for every job advertised. If benefits were cut and employees left, there were always people willing to take on the work. This allowed employers in the private sector to bank more profit for themselves, leaving employees held in their posts by the fear they would be unable to find alternative jobs if they left.

The latest survey finds nearly one-quarter of all families relies on group insurance for life benefits. Most of these individuals are either in public service or they are relatively senior management and above. Research shows the actual value of these policies is inadequate to meet most families' needs. The policies are bought with an eye to the cheapness of the premium rates for the employer rather than for the quality of the payout for the beneficiaries. The average plan offers a benefit equivalent to one or two times the annual pay of the individual. The standard in an individual policy is to provide between five and seven years of pay. A further problem is these plans are often not transferrable so, if you leave your current job, voluntarily or not, the plan is unlikely to follow you.

The majority of private sector employers offer term insurance. The key advantage is this cover is underwritten at a flat rate without the need for a detailed medical assessment of the individual employees. This one-size-fits-all approach often means some of the standard benefits you would expect are actually missed out, e.g. cover for long-term care.

It's therefore to the advantage of your dependents to buy supplemental cover, i.e. to fill in the gap between the benefits provided by your employer and the actual needs of your family. Most employers' plans allow you to buy additional cover. So this must be a carefully costed decision. Look first at whether this additional life insurance can be transferred or left free-standing when you retire. Then consider the cost as against the life insurance quotes you get from private insurers. The most common advantage of the private sector is to sell policies with a cash value you can borrow against or sell should you need cash. Mostly the employers' plan is term which has no cash value building up in your favor. In other words, buying from a private insurer is probably best, but do a proper evaluation before making up your mind.

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