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.

Is My Work Life Insurance Policy Enough?

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 an “active” working status. If you become ill and unemployed before dying, the insurance may not pay.
  • Not Portable – You can’t take the policy 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 – You can’t take the policy if you leave the employer. Suppose your next employer doesn’t offer “Supplemental” insurance. In that case, 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 fewer 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 outside the workplace.

Advantages:

  • Potentially Lower Costs for Healthy – Coverage is dependent on your circumstances via underwriting. Healthy people typically experience significantly lower premiums than “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 continuous coverage. 
  • No Work-Related Restrictions – An “Individual” insurance policy is more likely to pay out benefits than employer-provided coverage. 
  • Multiple Options – You can choose from a large selection of term policies that offer various special features and flexible riders.

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, which 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.

Is a life insurance policy through your job enough?

Limitations on coverage

While your employer’s coverage may be inexpensive, it may not be adequate. If you’re single and don’t have children, this coverage might be sufficient for you. However, if you’re married with kids or own a home, or are considering any of these things, the amount of coverage provided by your job is unlikely to go very far. There is no one-size-fits-all solution; however, various specialists in the life insurance sector may propose purchasing protection many times your yearly income.

Options may be limited by policy.

Group life insurance policies are solely determined by your employer, which includes work life insurance. This implies you’ll have little influence over the policy’s specifics, and you won’t be able to customize it to meet your demands. A spouse will also receive restricted coverage.

You don’t have complete control.

Your employer may decide to terminate your life insurance policy at any time. You will lose your coverage immediately if they do so, with no input from you. In addition, because you work for an employer who is the policyholder rather than you, you’ll most likely have a hard time or be unable to communicate with the insurance company.

Leave Your Job

Your employer-sponsored life insurance is linked to your employment status, so if you decide to leave your job, retire, or get laid off, your coverage will likely terminate. If you can carry your employer-sponsored policy with you, you won’t receive the benefits associated with the employer. This implies that you would be paying extra for coverage that isn’t adequate.

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Frequently Asked Questions

What happens to my life insurance when I retire?

Basic life insurance policies vary from company to company. For example, some companies terminate the policy when you retire, while others allow you to keep the policy in force. You will need to check with human resources to determine their policies.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on 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.

The Annuity Expert is an online insurance agency servicing consumers across the United States. 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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