The Difference Between Employer and Individual Life Insurance

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Understanding Employer-Sponsored Life Insurance

Employer-sponsored life insurance policies are group policies offered by an employer to employees as part of their benefits package. These policies are designed to provide basic life insurance coverage for employees at a lower cost than individual policies. Two main types of employer-sponsored life insurance policies exist group term life insurance and group universal life insurance.

Group Term Life Insurance

Group-term life insurance is the most common type of employer-sponsored life insurance. It provides a specific amount of coverage for a fixed period, typically one year. In addition, theIn addition, the designated beneficiaries will receive a lump sum payment if an employee dies during the covered period. Group-term life insurance policies do not accumulate cash value and cannot be borrowed against.

Group Universal Life Insurance

Group universal life insurance is a more complex form of employer-sponsored life insurance. It is a permanent life insurance policy that offers both a death benefit and a savings component. The premiums paid by the employee are divided into two parts: one part pays for the insurance coverage, and the other part is invested in a cash value account that earns interest over time. The employee can withdraw money from the cash value account, borrow against it, or use it to pay the premiums.

Employer Vs. Individual Life Insurance

Individual Life Insurance Explained

Individuals purchase life insurance policies to provide life insurance coverage for themselves and their beneficiaries. An employer does not sponsor these policies and is not part of a benefits package. There are two main types of individual life insurance policies: term life insurance and permanent life insurance.

Term Life Insurance

Term life insurance is the simplest and most affordable form of individual life insurance. It provides a specific amount of coverage for a fixed period, typically between one and 30 years. In addition, the designated beneficiaries will receive a lump sum payment if the policyholder dies during the covered period. Term life insurance policies do not accumulate cash value and cannot be borrowed against.

Permanent Life Insurance

Permanent life insurance is a more complex form of individual life insurance. It provides coverage for the policyholder’s entire lifetime as long as the premiums are paid. There are several types of permanent life insurance policies, including whole life insurance, universal life insurance, and variable life insurance. These policies offer both a death benefit and a savings component, which can be borrowed against or used to pay the premiums.

Pros and Cons of Employer-Sponsored Life Insurance

Employer-sponsored life insurance policies have their benefits and drawbacks that must be considered.

Pros of Employer-Sponsored Life Insurance

Employer-sponsored life insurance policies are often less expensive than individual policies, as the employer pays a portion of the premiums. They also do not require a medical exam or underwriting, making it easier for employees to obtain coverage. In addition, group universal life insurance policies can offer a savings component, which can accumulate over time and be used to supplement retirement income.

Cons of Employer-Sponsored Life Insurance

Employer-sponsored life insurance policies may not provide enough coverage to meet the needs of the employee’s beneficiaries. The coverage is typically only in effect while the employee works for the company, and it may not be portable if the employee leaves the company. Also, group universal life insurance policies can be complex and may not provide enough coverage to meet the needs of the employee’s beneficiaries. The coverage is typically only in effect while the employee works for the company, and it may not be portable if the employee leaves the company. Also, group universal life insurance policies can be complex and may require additional fees or charges.

Pros and Cons of Individual Life Insurance

Individual life insurance policies also have their benefits and drawbacks that should be considered.

Pros of Individual Life Insurance

Individual life insurance policies offer more flexibility regarding coverage amounts and options. The coverage is portable and can follow the policyholder, even if they change jobs or retire. In addition, some permanent life insurance policies offer a cash value component, which can accumulate over time and be used as a source of savings.

Cons of Individual Life Insurance

Individual life insurance policies can be more expensive than employer-sponsored policies, especially for older policyholders or those with pre-existing medical conditions. In addition, the policyholder may also be required to undergo a medical exam or underwriting, making it more difficult to obtain coverage.

Next Steps

Choosing between an employer-sponsored life insurance policy and an individual policy can be difficult. It is essential to consider each option’s benefits and drawbacks carefully, as well as your financial situation, health status, and overall needs. If you are unsure which option is correct, speaking with a financial advisor or insurance agent who can provide guidance and advice based on your specific circumstances may be helpful. Ultimately, the most important thing is to ensure that you have adequate life insurance coverage to protect yourself and your loved ones in an unexpected tragedy.

Employer Vs. Individual Life Insurance

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Questions From Our Readers

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.

Is it better to get life insurance through an employer?

Is life insurance through an employer the better option? Well, typically, premiums will go up as you age. However, obtaining coverage from your employer is usually available at a discounted rate compared to individual plans. In other words – additional coverage could be beneficial and ultimately more affordable!

What percentage of people buy life insurance through their employer?

A recent survey revealed that 25% of adults in America are only protected by employer-provided life insurance. This data is even more pronounced within the male demographic, with 33% being solely covered through their job’s policy, while this figure drops to 20% amongst women.

What happens to employer-paid life insurance when you retire?

So, what happens to employer-funded life insurance when you retire? Generally speaking, employers often pay increasing premiums on a “pay as you go” basis. On the other hand, some companies might opt for pre-funding the retiree’s life insurance by paying premiums into an account explicitly reserved for retired lives throughout their employment period.

Why should employers offer life insurance?

Employers should strongly consider offering employees life insurance to build a secure and peaceful work environment. Studies conducted by the Consumer Financial Protection Bureau have revealed that workers concerned about providing for their families lose focus on productivity. Life insurance can help assure them they can be more productive in the workplace.

What are the benefits of having insurance through your employer?

Are there any advantages to getting insurance through your employer? Absolutely! Your employer helps reduce the cost of premiums by sometimes splitting them with you and handles all the tedious tasks involved in selecting appropriate healthcare plan options. Plus, if you make premium contributions from your employer’s side of things, those are NOT taxable under federal law; furthermore, you can even deduct pre-tax payments for further reductions on your tax bill.

What are the disadvantages of employer-based insurance?

Employer-based insurance plans can be restrictive and inflexible for employees. Because the employer is responsible for selecting the plan, workers have no choice in what network they’ll use, their deductible amount, or their premium cost. As a result, one employee may find the plan an ideal fit, while another might not benefit from it as much due to its insufficient resources.

What steps should my future mother-in-law, who was diagnosed with schizophrenia and delusional disorder and is unaware of her benefits, take to claim her deceased husband’s insurance policy through his job, with her son’s assistance?

To claim the insurance benefits, your future mother-in-law or her son should contact the employer’s HR department or the insurance company directly. They must provide a death certificate and complete any required claim forms. Since she has been diagnosed with schizophrenia and delusional disorder, it might be helpful for her son to assist or manage the process, possibly through a legal power of attorney if necessary.

Related Reading

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost to you if you purchase a policy. It helps us keep the lights on!

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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