Individual versus Employer Life Insurance: A Comparison

    Individual versus Employer Life Insurance: A Comparison

    By Amy Fontinelle

    Almost 70 percent of employees have access to life insurance through work, and 80 percent of those employees take advantage of this benefit, according to LIMRA, an insurance industry research organization based in Windsor, Connecticut. Half of U.S. workers have the option to purchase supplemental life insurance policies through their employer, and about 50 percent of this group buy it.1

    If you only have a life insurance policy through work, however, you may not have nearly enough coverage. You also risk losing your insurance and paying higher premiums than you might need to. So you may want to consider an individual term life insurance policy even if you have access to life insurance through work. (Related: Term Life Insurance)

    Employer Life Insurance Benefits Aren’t Guaranteed

    When someone else — the company you work for — is subsidizing your coverage, you have less control over it than you might want over something as important as life insurance.

    Group plans can be changed, reduced, or dropped, said Scott Stratton, a Certified Financial Planner® professional, who holds the Chartered Financial Analyst designation and is the president of Good Life Wealth Management, a registered investment advisor firm in Dallas, Texas.

    Group life insurance coverage often isn’t portable if you change jobs or get laid off. And these aren’t the only uncertainties that come with group coverage.

    “The cost of group coverage is not guaranteed, whereas when you buy a 20-year level term policy, your premium is fixed and guaranteed for 20 years, and it’s your policy regardless of where your career takes you,” Stratton said in an interview.

    Like health insurance, you don’t want to go without a life insurance policy for any period of time because you never know when you might need it.

    You Might Not Get the Best Policy Rate

    According to LIMRA, most people think life insurance costs more than it really does, some overestimate the cost by as much as double the actual premium.2

    Factors that affect your life insurance premiums include age, health, driving record, and credit history. If you have strong credentials in these areas, you’re a great candidate for an individual policy. Even if you think you aren’t, make your decision only after consulting with a financial professional and getting quotes — you might be pleasantly surprised at what you qualify for and what it costs.

    If you’re in very good health, you may receive a preferred rate on an individual policy, Stratton said. “Individual policies are underwritten, meaning your rate depends on your health, medical and family history, and risk factors,” he said.

    Group policies, by contrast, are not underwritten and do not exclude anyone, so they are much more expensive, Stratton said. If you qualify as preferred or preferred plus, you may be able to buy an individual term life insurance policy that has several times the death benefit as your group coverage, for the same annual cost.

    If you have significant health issues, however — maybe you have diabetes or are a cancer survivor — a group policy may be your only option and a great value, Stratton said. Group policies offer coverage to those who may otherwise be uninsurable.

    But another consideration: group life insurance premiums aren’t guaranteed. They will likely increase over time, so even if they’re cheaper than an individual policy at first, they might become more expensive over time than individual premiums, which for many policies are guaranteed to be the same each year.

    Benefits of a Group Life Insurance Policy May Be Limited

    Many group policies offer small benefits of $25,000 to $100,000, Stratton said. Typical group life insurance coverage through a company offers a benefit of one times your salary, with the option to buy more. While that’s better than nothing, it might not be sufficient to protect your family.

    Such a low death benefit won’t come close to replacing the income you would have likely earned over a full career.

    Stratton said when his firm analyzes a client’s life insurance needs, they typically find they need $500,000 to $2 million to pay their debts, send their kids to college, and support a surviving spouse. (Related: How Much Life Insurance Do I Need?)

    While you may be able to purchase a limited amount of additional coverage that you pay for out of pocket beyond what your employer offers as a free benefit, for a total of three to four times your annual salary, total coverage still might not be nearly enough, especially if you are supporting a family.

    If you’re single, however, or if you’re married but your spouse works too and you don’t have or plan to have kids, that benefit might be sufficient.

    Speaking of spouses, if you insure your spouse through your employer’s life insurance, he or she may be underinsured, too. If your spouse stays home with the kids, for example, how much money would it take to pay someone to replace them as a caregiver until the kids are grown so you can continue to work?

    Individual life insurance can be a great complement to or substitute for any life insurance you’re eligible for through work. It’s a bit more trouble to apply, since you’ll have to go through medical underwriting, but it’s the best way to make sure you have as much coverage as you need, to lock in your premiums, and to make sure you’re still covered even if you stop working for your current company.

    More information:

    Life Insurance in Your 40s: Pros, Cons, and Timing

    Wills and the Basics of Estate Planning

    1 LIMRA, “Facts from LIMRA: Life Insurance Awareness Month,” September 2015.

    2 LIMRA, “Facts from LIMRA: Life Insurance Awareness Month,” September 2015.