Getting past Canadians’ false sense of security about group life benefits

Group benefits often give Canadians a false sense of security about the state of their life insurance coverage. Ask a sampling of employees who have group benefits, and a significant number will tell you that they have life insurance already – through their employer-sponsored benefits program. Few will be able to tell you just how much they have. A large number will likely be underinsured.

Worse, a survey of Canadians who have group benefits life insurance and no other coverage, found that the majority of those who fall into this category are between 30 and 50 years of age, a group that is often saddled with significant liabilities which would pose a hardship to those left behind were they to die without additional coverage.

“Canadians think of life insurance as a binary product – you either have it or you don’t have it. I think a lot of that comes from their experience with auto insurance and property insurance, which is a lot more prevalent,” says Andrew Ostro, founder and CEO of PolicyMe. “I think it definitely is a false sense of security – it’s not binary. If you follow up with a question about how much coverage you have, almost all of them won’t be able to answer that question.” (The PolicyMe survey of more than 1,000 Canadians back in August 2020 found that 53 per cent of Canadians who have life insurance through their employer, and no other additional coverage, were between 30 and 50 years of age.)

An opportunity to educate 

“When you do a full needs analysis, they quickly realize that the benefits plan falls short.” - Matt Hageman

For advisors, the sentiment might be frustrating, but many say the existence of a group benefits plan can be an opportunity to educate in a low-pressure way about the plan’s design and the need for a proper analysis and discussion about their expenses.

“When you do a full needs analysis, they quickly realize that the benefits plan falls short,” agrees Matt Hageman, employee benefits consultant with HMA The BENEFITS People. “If you’re getting $25,000 of life insurance, that will cover almost nothing once you start paying for expenses or when your family starts paying for expenses.”

Although the plan will allow a family to pay for a funeral, and be kept mostly whole, depending on how many people they want in attendance, the amount will not be enough to pay off a mortgage, provide an education fund or replace lost income.

“A 45-year-old employee earning $50,000 a year will earn over $1.2-million by age 65, assuming a two per cent annual increase in income,” says Benefits Architect Group consultant, Nigel Ottley. “Employees should not be using their group life insurance to fund things like mortgages or other items with long-term needs.” 

Beyond the low face amounts offered, those well versed in insurance also already know the limitations of a group policy: Employees leave jobs and their benefits coverage behind, many times to find out that they are no longer insurable as their age increases. Benefits also usually cease at retirement. Exclusions in group coverage too are also perhaps something to consider – where an individual life insurance policy will likely allow the client to die any which way, except sometimes by suicide, a group plan can include a host of exclusions that will limit payouts if the employee is incarcerated or if they die under anesthesia, for instance.

More, there is no guarantee that employers will continue to provide such benefits in the future, either. Richard Sist, managing partner, financial services with Oracle RMS Insurance Risk Management Services says almost no employers in his book cancelled their benefits plan in the past year and a half – bad optics during a pandemic – but the practice, although a surprise for employees who’ve had their benefits removed or reduced, is not unheard of either.

Low lump sum amount 

In short, group benefits plans which do provide life insurance coverage, generally offer a somewhat low, lump sum amount – between $10,000 and $30,000 typically – or, for higher-end programs aimed at white collar workers or executives, the plans might pay out two or three times the employee’s salary, at the most.

Sist says for small groups too, under 100 lives, the majority only offer the minimum amount of $25,000. “You can’t get any less. That’s the minimum. They can’t piece it out. If that wasn’t the case, and it wasn’t forced, I would think 30 or 40 per cent would just say we don’t need it.” 

When these face amounts are compared to the average Canadian’s needs, the shortfall quickly becomes apparent. 

Ottley says funeral costs, an education fund, a mortgage and lost earnings can often add up to the need for coverage equal to five or 10 times a client’s annual salary. “The Canadian Life and Health Insurance Association (CLHIA), in their consumer booklet on life insurance, indicates that an individual should have five times to seven times their annual salary,” he adds. “Given that a generous group plan may offer three times salary, you can see that there is a significant shortfall.”

Needs analysis 

The challenge for advisors then, is to get in front of potential clients who have this coverage and do a proper needs analysis. Those selling group benefits to the employers, who also sell individual life products, do have their ways of reaching group members – handouts for employees, ensuring that every employee has their cell phone number in small groups, and providing lunch and learn sessions, webinars, and ongoing social marketing aimed at those in the age group which require the coverage the most (Hageman says he’s had a lot of success using videos and Instagram, for example) – but they add that employees are rarely beating a path to their door to take them up on the offer. “They don’t want to go looking for another cost,” he says.

For those who do need coverage, however, once they get in front of an advisor, the group benefits coverage can be a great starting point for a discussion about broader needs.

“You’re not going to go in and say, ‘hey, your employer is cheap, you’re only getting $25,000.’ Explain that there’s a gap and explain the value of planning,” Hageman says. “Once they do that planning, once I actually have an hour or half an hour of a needs analysis done with someone, that closing rate goes way up because they're seeing the value and they’re learning, in a very low-pressure way, about what they need to be covered.”