The Difference Between Employer and Individual Life Insurance

Shawn Plummer

CEO, The Annuity Expert

More than half of employers offer life insurance as a standard benefit with the option to increase the death benefit amount, but is it the right decision to purchase more life insurance coverage through your employer or purchase an individual policy on your own?

This guide will go over the difference between group and individual life insurance and its advantages and disadvantages.

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Is My Work Life Insurance Policy Enough?

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Employer (Group) Life Insurance

Basic Term Life Insurance Policy:

For some, the policy coverage is a flat amount (A flat $50K of coverage). For others, it is based on one’s salary (coverage = 1.5 x current salary).

Advantages:

Disadvantages:

  • Work-Related Restrictions – Coverage typically requires “active” working status. If you become ill and unemployed before dying, the insurance may not pay.
  • Not Portable – Can’t take the policy with you if you leave the employer. The next employer may not offer life insurance.

Supplemental Term Life Insurance Policy:

Some employers offer to buy additional life insurance, 2x salary, 3x salary, etc., called voluntary life insurance. This can be added to the “Basic” coverage.

Advantages:

  • Convenient – Sign up at work; premiums get deducted from paycheck (if issued).
  • Minimal Underwriting (if any) – There may be some high-level medical questions (e.g., “Have you ever had a heart attack?”) or a medical exam.
  • Potentially Lower Costs for Unhealthy – Have health issues? Your premiums may be lower than for an “Individual” policy because they are based on covering a group (the young, old, healthy, and unhealthy).

Disadvantages:

  • Work-Related Restrictions – Like the “Basic” coverage, it typically requires you to be “actively” working.
  • Not Portable – Can’t take the policy with you if you leave the employer. If your next employer doesn’t offer “Supplemental” insurance, then you may need to purchase an “Individual” policy to maintain the same level of coverage – paying higher premiums based on your age and health.
  • Increasing Premiums – Typically, costs increase each year as you age.
  • No Options – Employer coverage typically offers few or no bells and whistles that an “Individual” policy may include.

Voluntary Life Insurance

Voluntary life insurance is an option for employees to purchase a life insurance policy in addition to the employer’s life insurance that the employers provide as a benefit. The employer will also offer the option to purchase a policy for a spouse or children. The premiums for the voluntary life insurance are paid by the employee (not the employer).

Pros

Because the employer is purchasing group life insurance coverage on a large scale (all their employees), the premiums are discounted and lower for the individual employee.

Voluntary life insurance does not require a medical underwriting exam to purchase additional coverage. This is helpful for those with preexisting medical conditions.

Cons

Once the employee separates from the employer, the life insurance coverage is null and void. Though the premiums are lower, the length of coverage is limited.

INDIVIDUAL LIFE INSURANCE

Individual Term Life Insurance Policy

A policy purchased from an insurance company or a licensed agent that is outside of the workplace.

Advantages:

  • Potentially Lower Costs for Healthy – Coverage is dependent on your circumstances via underwriting. Healthy people will typically experience significantly lower premiums compared to “Supplemental” insurance. 
  • Level Premiums – Term policies lock in the premium for a fixed period. 
  • Portable – Since this policy is not connected to your employer, it is completely portable, providing you continuous coverage. 
  • No Work-Related Restrictions – This means that an “Individual” insurance policy is more likely to pay out benefits than employer-provided coverage. 
  • Multiple Options – Can choose from a large selection of term policies that offer various special features and riders that provide flexibility.

Disadvantages:

Underwriting process – Policies are, typically, fully underwritten, meaning that your policy will be based on your health and other factors. Therefore, there will be more questions than for the “Supplemental” insurance and may include some medical tests.

How do I decide what to do?

  1. Always take advantage of free “Basic” employer-provided coverage.
  2. Determine how much insurance you’d like to have. 
  3. Get quotes for both “Individual” life insurance and “Supplemental” group life insurance for the coverage needed in addition to the “Basic” employer policy. 
  4. When making your decision, consider the features/benefits that are important to you.

Individual Life Insurance Quotes

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Compare life insurance quotes from 25 companies in seconds. Then, apply for coverage in less than 10 minutes.

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Shawn Plummer

CEO, The Annuity Expert

I’ve sold annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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