How to layer life insurance for full coverage

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

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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 the resources they may need—without placing undue pressure on you today.

Step one is determining how much life insurance you may need. A good place to start is Fidelity’s Term Insurance Needs Estimator.1 Then consider how you might meet those needs through group and/or individual life insurance. By combining the advantages of different insurance products, you can help further ensure that your family’s future quality of life and goals stay within reach.

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 each one works and the potential role they could play in your overall protection strategy.

Step one: 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. 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 for employer-paid or -provided benefits, the employer determines coverage limits, controls the policy, and can change or discontinue it at any time. Unless provisions within the policy allow for it, this type of coverage will 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.

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, he or she will generally have to demonstrate evidence of insurability, much like with an individual life insurance policy.

Step two: 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 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. The cash value of a policy accumulates over time as premiums are paid. For both temporary and permanent forms, individuals 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, unlike with group policies, the individual life policy is portable, so, regardless of 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, for people who do not pass preferred underwriting guidelines for individual coverage, group life insurance is an attractive option. Purchasing additional coverage—beyond what is provided as an employee benefit at group rates—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 will likely 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 the employer’s group rate.

“Group life insurance creates a false sense of security, because it’s usually not enough to cover the life insurance needs of most individuals,” says Keith Kruk, regional vice president of Fidelity Investments Life Insurance Company.

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.

There are several types of individual life insurance policies that can help your financial plan or that may be appropriate for different stages of your life:

Term insurance, the least expensive kind of individual life insurance, is designed for income replacement, whereby a benefit will be provided for those who are relying on your income, like your children or spouse. Says Ewanich, “It’s a cost-effective way for families to insure against the passing of a wage earner.”

Whole life and universal life are two types of permanent insurance policies that build up cash values over time, but are more expensive. “Permanent insurance is typically used for the transfer of wealth, which might be more relevant later on in life when you’re trying to protect your estate,” Ewanich adds.

Even if group life insurance covers three times a person’s salary, it may not be enough. That’s because it takes a lot more to replace lost income over a number of years. In fact, according to Fidelity's Term Insurance Needs Estimator, an individual who is approximately 25 years from retirement and looking to replace a pretax income of $100,000 would need approximately $1.4 million of term life insurance. In addition, group coverage can get left behind if you leave or lose your job. “Most group life insurance isn’t portable or the cost may increase dramatically when you leave your job,” says Tom Ewanich, a vice president and actuary at Fidelity Investments Life Insurance Company.

Step three: 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.

“A layered approach, using both group and individual coverage [as seen in the graphic below], may be the best way to tap into the advantages of each and form a solid life insurance plan,” explains Kruk. “By doing so, you diversify your coverage sources to meet your total life insurance needs. 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.

“Group coverage could be your small base layer,” adds Kruk. “Then you might add an individual insurance layer, based on your budget, and what you might need at different stages of your life.” Of course, what goes into that individual layer could change over time. Kruk 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 for income replacement 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.

Kruk suggests possibly designing your individual layer to cover the portion of life insurance you would lose in group coverage if you leave your employer. "Consider purchasing a policy that gives you the option to buy a certain amount of additional insurance without providing proof of insurability."

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.

Learn more

  • Learn more about term life insurance.
  • Use our Term Insurance Needs Estimator to project your annual income and estimate your insurance coverage needs between now and your retirement date. Be sure to consult Fidelity's licensed insurance representatives about the amount of coverage you may need for your family.
  • Contact a Fidelity life insurance specialist at 888-343-8376 from 8 a.m. to 5 p.m. Eastern time, to learn more.
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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.

Fidelity Insurance Specialists are licensed insurance agents.

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, in New York, Empire Fidelity Investments Term Life Insurance (Policy Form No. EFTL-99200) is issued by Empire Fidelity Investments Life Insurance Company,® New York, N.Y. Some insurance policies are issued by third-party carriers, which are not affiliated with any Fidelity Investments company. Fidelity Insurance Agency, Inc., is the distributor.
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.
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