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Layering life insurance for full coverage

A mix of group and individual life insurance policies may be a smart choice.

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Key takeaways

  • Review your group life insurance options.
  • Consider individual life insurance.
  • Layer your individual and group life insurance coverage.

When you have a family, protecting them is job number one—and that includes planning in the event of your death. Would your family be able to pay the bills, send the children to college, keep the business running without you? Fortunately, life insurance can provide your loved ones with necessary resources in their time of need.

To get started, you should determine how much life insurance you may need. Term Life Insurance Needs Estimator is a good place to start for common needs, but you may want to consult a financial advisor for more complex estate planning.1,2 Then consider how you might meet those needs through group and/or individual life insurance. By combining the advantages of different life insurance products, you can help secure your family's financial future.

Read Viewpoints on Fidelity.com: 4 questions to ask about life insurance.

Like diversifying an investment portfolio, choosing a few different life insurance options can offer you a broader range of coverage opportunities. Below, we review the different types that are available, which may help you have a better understanding of how they work and the potential role they could play in your overall protection strategy.

Step 1: Review your group life insurance options

Group life insurance is purchased by a well-defined group, such as the company you work for or a professional organization you belong to. In the case of a company, employers own the group policy and offer coverage to eligible employees, either at no cost as part of an employee benefits package, or as an elected benefit at a group rate. It's important to understand that if your employer pays for or provides benefits, the employer determines coverage limits, controls the policy, and can change or discontinue it at any time. This type of coverage may end when you separate from service with your employer.

Group insurance rates are based on the makeup of the group of employees or members who are covered and, when coverage is provided to all eligible employees, do not take into account the health issues of any particular individual. As a result, there is no individual health assessment—or personal underwriting—involved. Group life insurance rates are based on both the volume and risk profile of the entire group. As a result, in many cases it can be advantageous to take over a company insurance policy, making it an individual policy, immediately after separating from an employer. 

In some cases, the individual can carry the policy under the same terms as the employer, and these terms are often better than what an individual could obtain on his or her own. But there is often a short window following separation during which the individual is eligible to take over the policy, so be sure to check with the insurer immediately after—or if possible, before—leaving your employer. And of course, even if it is possible to assume the policy, the insurance coverage may no longer be needed, or a new employer may offer similar insurance for little or no cost, so consider all options carefully before making a decision.

Typically, employers will make some baseline level of life insurance coverage available to all eligible employees. Sometimes an employer will make additional optional life insurance coverage available, which the employees must elect and pay for themselves. In these situations, there may be an amount available without evidence of insurability (proof of good health) when an employee first joins the company, but coverage must be elected right away, often within 60 days of employment. The employee may elect coverage at a later date but, if so, they will generally have to demonstrate evidence of insurability, much like with an individual life insurance policy.

Step 2: Consider individual life insurance coverage

Individual life insurance is most often purchased to insure one life. Some individual policies may include additional lives (typically children) through a policy rider.

Individual life insurance can be temporary (for example, term) to cover a certain number of years; or permanent (for example, whole or universal life), which is intended to provide coverage until a person's death. Permanent policies typically have a savings element that is referred to as a cash value. Some types of permanent policies such as variable universal life insurance allow for investing the cash value in investment options that provide exposure to equities, bonds, or other investments. The cash value of a policy accumulates over time as premiums are paid. For both temporary and permanent forms, individuals usually must go through a health assessment (underwriting) to determine coverage eligibility and cost.

With individual life insurance, unlike with group life insurance, the individual controls the policy and chooses the coverage amount, term (if applicable), and any optional extra coverage (riders). Typically, an individual policy stays in force as long as the owner continues to pay the premium, or if there is enough of a cash value in the policy to sustain it. Also, an individual life policy is not dependent on your employment status; a benefit will be provided as long as the contract is in force when you die.

The chart below details some of the major differences between group and individual life insurance. Understanding these differences will help you see how each type of insurance might help play a role in your own financial plan.

Weighing the pros and cons

Typically, group life insurance can be an attractive option, particularly for people who may not pass preferred underwriting guidelines for individual coverage. Purchasing additional coverage—beyond what is paid for and provided by the employer—will help these individuals meet their full life insurance need. However, that may require an individual medical exam, which may prohibit coverage at a potentially favorable group rate.

Alternatively, for individuals who are in favorable health and meet the preferred underwriting guidelines for individual coverage, it may be in their best interests to meet their full life insurance needs with an individual policy, because their health status may qualify them for more favorable pricing than offered by the employer's group rate.

"Purchasing an individual policy is a good idea because employer-provided coverage may fail to sufficiently cover people's life insurance needs," says Tom Ewanich, a vice president and actuary at Fidelity Investments Life Insurance Company.

Another consideration is how the costs will change as you age or if you leave your employer. "Certain types of individual life insurance, such as term insurance, allow individuals to lock in a level premium for a defined period—for example 20 years—whereas group insurance premiums typically increase as people age" says Ewanich. "It's also important to understand what options you'll have if you leave your employer. Find out if you'll be able to continue coverage at similar costs or if rates are higher for those no longer employed with the company. This will be a good indicator to determine how much you want to rely on group coverage for the long run relative to individual life insurance."

Step 3: Layer your life insurance coverage

For many people, combining—or layering—the best aspects of each type of insurance can help them build a protection plan that is right for them.

"Combining group and individual coverage may be the best way to tap into the advantages of each and build a solid life insurance plan," explains Ewanich. "This allows you to blend the benefits of a group life insurance policy's ease of attainment with an individual life insurance policy's portability and control to meet your life insurance needs."

"Group coverage could be your base layer," adds Ewanich. "Then you might add an individual insurance layer, based on what you might need at different stages of your life, and factoring in your budget." Of course, what goes into that individual layer could change over time. Ewanich points out that many people fill the largest part of their individual insurance need with term life insurance, given the lower cost.

"Because term life insurance is designed to provide for your lost income during your working years, you may not need it if you can afford to retire," Ewanich notes. Based on your budget and the possible need to transfer wealth at some point, Ewanich says you could also add a layer of permanent insurance now while you are in good health, or revisit whether you may need to add permanent insurance later in life.

How to buy an individual policy

Purchasing an individual policy may prove trickier than it sounds. For one thing, it requires doing some homework in terms of selecting a reputable company and determining the right amount of coverage. In addition, a prospective candidate typically must go through a health assessment to determine eligibility.

However, the advantages may be well worth the effort. With individual life insurance, you are in control, your coverage is unaffected if you change or lose your job, and it will generally stay in force as long as you pay your premium or the policy has a cash value.

Depending on your family's needs and goals, you will need to make the choices that best address your individual situation. While working with a financial advisor is suggested for complicated estate planning needs, you should be able to address common goals, including college funding or mortgage protection, by balancing the best of group and individual life insurance.

Ultimately, what you hope to create is a life insurance program that not only fits your budget, but includes key ingredients to help serve specific purposes within your financial plan.

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Fidelity Insurance Specialists are licensed insurance agents.
Proceeds from your term life insurance policy are not generally subject to income tax; the full-face amount of your policy is paid directly to your beneficiaries. Consult a financial or tax adviser about your specific financial situation.
1. The results from the Estimator tool should be used only as a guide, not as a recommendation. There may be other factors that you'll need to consider when ultimately deciding how much life insurance is appropriate. The Estimator's results are hypothetical and are based on certain assumptions, which may differ significantly from your individual situation.
2. Those with complex financial needs, including legacy planning, should consult with experts including financial and estate planners and attorneys.

Fidelity Investments Term Life Insurance (Policy Form Nos. FTL-96200 et al. and FTL-99200 et al.) is issued by Fidelity Investments Life Insurance Company and, for New York residents, Empire Fidelity Investments Term Life Insurance (Policy Form No. EFTL-99200 et al.) is issued by Empire Fidelity Investments Life Insurance Company,® New York, N.Y. Fidelity Insurance Agency, Inc., is the distributor.

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