Life Insurance that Doesn’t Pay

How much are you willing to pay for life insurance that most likely won’t be paid if you die? Probably not much, if you know that your family won’t collect. I’ve always been suspicious of life insurance offered by employer benefits plans, and now I have a friend whose situation has confirmed my suspicions in at least one case.

If you die suddenly in some way, there is no problem with life insurance from an employee benefit plan (apart from the fact that you’re dead!). The scenario that always worried me was what if I become terminally ill with cancer or some other horrible disease, and I’m unwilling or unable to continue working? Or maybe I develop a condition that prevents me from passing a physical to get life insurance, and then I get laid off.

A friend of mine is in this last situation, laid off and unable to qualify for life insurance. Years ago, I asked about scenarios like this and was told by my employer that the life insurance is renewable. This means that employees are able to get an individual policy without have to take a physical to prove that they are insurable. Another employer told me the same thing years later.

Jim’s story

To protect my friend’s privacy, I’ll call him Jim. For years Jim paid for about half a million dollars of life insurance through his employer’s benefits plan. Around the time he was laid off, Jim also got some bad news from his doctor. Knowing that he couldn’t qualify for new life insurance, Jim tried to take advantage of the renewability feature of his employer’s plan.

The insurance company that runs the benefits plan for Jim’s employer told Jim that only $200,000 of his life insurance was renewable. This was shocking news. This sounds like a lot of money, but it is far less than the half million he paid for and that his family would need to carry on without him.

Had Jim known years ago that most of his life insurance wasn’t renewable, he would have bought a half million dollar renewable policy on his own instead of using his employer’s plan. Jim lost the opportunity to properly protect his family.

Jim continued on thinking that coverage of $200,000 was better than nothing. The insurance company gave Jim a hard sell on forgetting about renewing his policy and just going for a physical to get the lowest possible premium. Of course, this would actually mean that he would be rejected. Jim stuck to his guns and was told that the renewed $200,000 policy would cost him $50 per month. This isn’t a very competitive rate, but it’s not unusual for the guaranteed renewal rate to be somewhat higher than the going rate.

For Jim, paying a slightly higher rate would be better than no life insurance at all. The insurance company hit him with another hard sell to forget about renewal. When they finally gave up, they then told Jim that his policy would cost $225 per month and that he must have dreamt the $50 figure.

So, now Jim is looking at paying about 7 times as much per unit of coverage as he was paying before, and he only has about 40% as much coverage. It is fair to say that Jim’s life insurance was not truly renewable in any reasonable sense.

What about the rest of us?

You may think that Jim’s case is unusual somehow, but he worked for a large Canadian company whose benefits plan is run by a large Canadian insurance company. There is every reason to believe that a great many Canadians who rely on life insurance through their employers are at risk.

How can you tell if you are at risk?

If you have life insurance through your employer, you need to know whether it is renewable, how much of the insurance is renewable, and what the guaranteed premiums will be. These things should be in writing. If your employer is unable to provide this information in writing, then you have good reason to believe that you may be at risk.

If you are told that insurance companies don’t put this sort of thing in writing, don’t believe it. When I bought my first individual term life insurance policy, the contract contained a table that outlines exactly how much I would pay each year to continue the policy. I had the option to cancel any time if I found a better deal, but the insurance company was obligated to continue my coverage as long as I paid the premiums.

I’d be pleased to hear from anyone with information on how widespread this problem is and if there is anything Jim can do to improve his situation.