May 08, 2024

How to make the most of your life insurance at work

By Sun Life Staff

Employer-provided life insurance is a great benefit. You can make it even better with these simple tips.

Does your employer provide group life insurance as part of your employee benefits? If so, you're already off to a great start. And with a few simple steps, you can give your family even more peace of mind.

You can start by either:

  • adding additional optional life insurance through your group plan (if the option exists) or
  • complementing your group coverage with your own individual policy.

We've asked an expert to show us how, and give us some tips to make sure we're making the most of our life insurance, be it individual, group or a combination of the two. First, though, let's start with some similarities and differences between group and individual plans.

Both group and individual life insurance provide a tax-free payout (called the death benefit) to your beneficiaries when you die.

Nearly all group life insurance benefits are term plans that protect you while you're covered by your employer. Individual term life insurance protects you if you die during the term of your policy, as long as you pay your premiums. (*Premiums refer to your monthly or annual fees.)

There are some key differences between group and individual term insurance. Here's what you need to know:

How much coverage does your group life insurance plan offer and how long does it last?

Group plans provide a basic level of coverage often paid for by your employer. "This is usually a benefit. The exact amount of the benefit can vary from $25,000 to $75,000.  In some cases, it might even be more than that." says Brent McKay, a Sun Life advisor in Simcoe, Ont. "Or, your employer may provide a one-time payout that matches your annual salary."

This coverage ends when:

  • you reach the policy's maximum coverage age or
  • when you leave the company, at which point you may be able to convert it to individual coverage.

For example, Sun Life will let you convert up to $200,000 of group life-insurance coverage-$400,000 in Quebec-to individual term or permanent life insurance after you leave your job.

Plus, you can convert your coverage without a physical exam or any health questions, so long as you do so within 31 days after your workplace coverage ends. This is often referred to as a rollover. Some rollover plans even give you 60 days to apply for coverage after your last workday, provided you answer a few health questions.

Can you add additional optional life coverage to your group plan?

You may be able to add additional optional life coverage through your group plan, beyond your basic coverage, up to certain limits. You, not your employer, would pay the premium (monthly or annual fee) for this extra insurance. Also, group optional life coverage is annually renewable, so your premiums could fluctuate from year to year.

Rates for optional life coverage through your group plan may be lower, depending on your circumstances. But that's not always the case. It's best to speak with an advisor if you're considering adding additional coverage. An advisor can help you figure out which route is best for you.

You can also easily get a quote online for life insurance with Sun Life GO.

What does an individual insurance plan have to offer?

Individual plans are "portable." In other words, they're not tied to your job. You own the coverage and if you leave your job or change employers, you continue to keep your coverage.

An affordable complement to group coverage is term life insurance. You can get a term life insurance policy that offers protection for a set amount of time, say 10- or 20-year periods. Your premiums will stay the same for the term you choose.

What happens when you reach the end of your term policy? Your policy will renew for the same term you chose, and your premiums will rise at this point. You may renew your policy after every term until you reach the expiry age. You also have the option to convert your individual term policy to permanent coverage without providing health information.

Term life vs. permanent life insurance: What you need to know

Permanent insurance policies cover you for your entire life, no matter your age. Like term policies, they pay a tax-free death benefit to your beneficiaries after you die.

Some types of permanent insurance, such whole life also have cash value that can grow over time. Depending on the type of policy, you may be able to access this cash value with a policy loan or a withdrawal.

Understanding these differences, here are five expert tips for making the most of your life insurance plan.

1. Top up your life insurance

Generally speaking, having an individual policy in addition to group coverage is a good idea. Why? Because many group plans have:

  • basic coverage that may offer anywhere from $25,000 to $75,000 (if not more) or
  • a one-time yearly salary payout.

But most people need more coverage than that to help their families replace their yearly income.

How much more do you think you'll need?

"One rule is 10 times your income, but that's too general," says McKay. "With life insurance, each person's needs are too different to go by any rule of thumb. Beyond income, you need to account for other factors. For example, you may consider your debt load and the number of children you have when deciding how much coverage you need."  (What's more, your employer may also have set limitations around how much optional group coverage you can get.)

You must also consider what you want your insurance to provide. "Let's say you want your life insurance benefit to help pay for your children's education. That's if you pass away and aren't able to help them," says McKay. "Do you want that life insurance benefit to fund four years of school or just help with the first year?"

This is where it helps to work with an advisor. They'll bring up questions like these to help you decide the right amount of coverage for you. They can also help you figure out the best way to use that coverage.

2. Name a backup beneficiary for your life insurance policy

"Most people name a spouse [as their group or individual policy's beneficiary] and stop there," says McKay. "What's less well-known is that you can name a secondary, or contingent, beneficiary."  

Let's say you and your spouse pass away together. If that were to happen, the life insurance benefit would go to the contingent beneficiary, not your estate. If you didn't name a contingent beneficiary, the life insurance benefit would go to your estate by default.

Your estate makes up most of your financial assets. This includes the things you own, like your home, your car and your investments. So long as there is a named beneficiary, life insurance is not part of your estate and goes straight to that beneficiary.

Bypassing your estate reduces the probate fees that will have to come out of your estate. In Ontario, for example, probate fees are nearly 1.5% of your estate's value. What does that look like in in dollars and cents? Your estate could pay around $7,500 in probate fees on, say, a $500,000 life-insurance benefit, if you don't name a beneficiary.

3. Protect your finances for the next generation

When you die, you're not free of debt and taxes. Your estate will have to pay them (unless you were bankrupt at the time of your death). This can be a financial burden to your family or loved ones, who may have to oversee your estate after you die. That's another reason to name a trusted beneficiary for your life insurance coverage. For one, it protects the benefit from creditors, who could lay claim to it if it were part of your estate. Since life insurance usually bypasses the estate, the death benefit will go directly to your beneficiaries.

For example, let's say you named your spouse and kids as your beneficiaries. This means they'll receive the full amount of your policy's death benefit after you die. The death benefit won't have to go through probate fees and estate taxes. This, in turn, leaves them more money they could then use to:

  • offset your estate's debt,
  • deal with a high tax bill,
  • pay for rent, mortgage or housing costs,
  • cover their tuition or
  • any other living expenses.

Remember, the more your estate has to pay, the less your family will receive after probate is complete. To put it simply: naming a beneficiary for your life-insurance policy and having the right amount of life insurance coverage can help ensure the maximum amount of money is available to offset liabilities like this one.

4. Protect yourself in case of a serious illness

A serious illness can take you by surprise. Medical advances mean many people recover successfully, but the journey can still be stressful and expensive. Planning ahead makes you better prepared for the unexpected, including a serious illness. You'll worry less about finances and be able to concentrate on what matters most – your recovery.

Critical illness insurance (CII) helps protect your finances if you're diagnosed with a serious illness like cancer, stroke or multiple sclerosis. It can help manage costs like:

  • lost income for you or for a family member who takes an extended leave from work to provide care,
  • travel to treatment centres,
  • medications you aren't already covered for and
  • unexpected day-to-day or household expenses during recovery.

Let's say you have to take time off work to recover from a serious illness. Critical illness insurance can help you maintain payments for your mortgage and other debts during this time. This means you're less likely to dip into your own personal savings or retirement savings to make up for the time you're not earning income.

Your group benefits plan may offer you the opportunity to purchase critical illness insurance. Or an advisor can help you customize a plan that's tailored to your needs.

5. Review your insurance coverage regularly

Finally, it's important to regularly review your coverage to ensure it still meets your needs. Your annual benefits review gives you a regular reminder to review your group coverage.  

"Your yearly group policy renewal is a great time for a review," says McKay. "Or, you can do so when you experience a milestone, like getting married, buying a home or having children."

Plus, meeting regularly with your advisor is also a good opportunity to consider how your life has changed and whether your financial plans are on track.

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