Employer-Sponsored Group vs. Individual Life Insurance

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I’m not an insurance or benefits expert, but while looking at life insurance I wanted to compare the coverage available from my employer vs. what I could buy on my own. As with most things insurance-related, there are big variations in group life insurance coverage, so I can only speak to what I have for the most part. We get a credit each paycheck for which we can spend on health, dental, life, and disability insurances.

Maximum Coverage
For my plan, I can only get up to $500,000 of coverage for myself and partner. So if I want more, my only choice would be to look privately for equivalent term life insurance.

Ability To Find Coverage
The best thing about group insurance from work is that your risk is spread across a big pool of people, so it should be easier to be granted coverage. But many workplaces still require you provide “evidence of insurability” once you increase your coverage limit past a certain amount. This may involve a simple questionnaire, or it could require a doctor exam and bloodwork. It seems unclear exactly how “healthy” you have to be in order to qualify for increased group coverage, but I’m guessing it would preclude major pre-existing conditions like cancer or heart disease. The limit where they start checking can also vary from $5,000 to $500,000.

Portability of Insurance
When you qualify for and buy a level term life insurance policy, you are guaranteed coverage for the length of that term (10, 20, 30 years, etc.). But if you rely on your employer’s group life insurance, usually the coverage stops when you leave the job. It’s almost like a 1-year term policy. My concern is, if you have you leave your job because you are seriously disabled, then you might end up both uncovered and unable to find new insurance.

However, looking around there might be some flexibility in certain plans. For one, you might have a “Waiver of Premium” benefit that continues the insurance protection through age 65 with no further premium payments should you become disabled. Or the policy may allow you to “continue coverage through an individual term policy without evidence of insurability as long as you continue to pay premiums”. Would this still be at the group insurance rates (minus employer subsidies)? A lot of this stuff seems to be left out of my Open Enrollment Guide, so I suppose an e-mail to the correct Human Resource person would be in order.

Many people get a certain amount of “free” life insurance from work, with the option to buy more. I think anything over $50,000 of coverage is paid with after-tax money, so I plotted out the monthly cost of my group plan vs. coverage levels below. I then went to Term4Sale and found the average of the top 5 quotes for both 15 and 30-year term insurance policy (rated A+ or better), for both the best tier of health (Preferred Plus) and the lowest allowable (Standard).

If you are youngish and in good health, even a long 30-year term policy is comparable to the group rates. Even if you are in average health, the cost of my employer group insurance is comparable to the premium on a 15-year term policy.

Again, this is only based on my plan, although I found my wife’s numbers to be similar. If you are lucky to have no-questions-asked insurance with high limits and you are in below-average health, it might be good to use your group plan. But if you are looking for extra coverage for a guaranteed period of time and are at least relatively healthy, it’s probably just as cheap if not cheaper to go with an individual plan. If you are an older worker, things may tilt back in favor to group life, but I haven’t run those numbers. In any case, it’s worth a comparison before your next Open Enrollment period.

We used to just buy some extra coverage from work due to the convenience factor, but why pay more when I could both save money and have a better, portable plan?

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  1. Have you ever looked into disability insurance? what do you think?

  2. ah, good question Bob. I’ve been looking into it myself a little bit, and I’ve been waiting for Jonathan to someday talk about it!

  3. What about the differences between term vs. whole life insurance? This has been a topic I’ve avoided but now that I have a wife and kid I’m starting to take it more seriously. Right now all I have is my job’s group policy plus Accident Death and Dismemberment.

  4. Have you considered EIUL: Equity Indexed Universal Life Insurance?
    I would like to know your opinion about EIUL in future insurance related articles.

    Thank you,

  5. Buying extra group life insurance is really easy, but makes sense to compare what you would pay for extra group life versus getting your own policy.
    Statistically speaking you are more likely to need disability insurance than life insurance prior to retirement. As a kid I though disability only meant someone who was seriously and permanently disabled, like a quadraplegic, but it turns out the definition of diabilty is much broader. The broader definition usually means not be able to do your job for a period of time (for example cancer or back pain or whatever). I think that a employer paid disabilty benefit is great. Mine provides a 80% of pay if I’m out of work less than 6 months (short term disabilty) and 50% of pay if I”m out of work more than 6 months (long term disabilty).

  6. This was a great post. I have one kid and one on the way, and I’m guilty of having no supplemental insurance besides the “free” work life insurance. Frankly, deciding whether to pick up life insurance has been a tough decision for me, but I’m finally getting around to it.

    I recently picked up disability insurance from my work. If I get some horrible disease that prevents me from working (without killing me), I want my family to have an income.

    I think it’s interesting to note the anomalies in your plot. Notice how there is practically no difference in monthly premiums between $50k and $100k coverage. The same is true for a healthy person at $200k and $300k. I’ve read somewhere that common coverage amounts tend to result in discounted coverage premiums, and I believe that the article mentioned specifically that $250k was of the more common policies. I wonder if there is any truth to that. I’d be interested to here any other anomalies out there.

  7. I’ve always believed that if your employer offers benefits such as life cover or a pension then it’s best to join the scheme as geting ‘something for nothing’ is always beneficial. If you do require additional cover over and above what your employer offers then I’d suggest taking out your own plan as there are several internet based brokers that offer very competitive deals. Although I’m still relatively young and fit so I’d hope to get a good rate.

  8. @ Robert – check out the book “The Wealthy Barber” – one of the chapters has a great, very thorough, discussion of term vs. whole life.

  9. Brad Ford says

    When I left my last employer, I was “allowed” to take it with me, but it was at an astronomical increase in premium. Needless to say, I didn’t buy it.

    What I learned: if you rely on the group and something changes (typically employment), you are at “their” mercy to decide terms and price.

    I think everyone needs a good, term policy taking them from age 25(when you are most insurable) to age 55 as a basic foundation of any life insurance program. As that person moves from job to job (common today), the group policy can be a supplement to the original life insurance program.

  10. You’ve really nailed it on the head. However, one thing you did not mention is health. With an individual policy, you are guaranteeing yourself coverage for 5, 10, 20, or even 30 years. Let’s say you have a group policy and you get sick and you also lose your job. Now, you’re stuck paying a higher individual rate than what you may have previously qualified for…or worse…you may be uninsurable. Take what you get free from work and purchase an individual policy if you’re young and healthy.

  11. Ali Mozaffar says

    The best type of insurance out there right now would be the EIUL which also provides retirement tax advantage income to you that could be a supplement to the employee-sponsored insurance.With EIUL , you also get additional benefit riders such as chronic illness rider, terminal illness rider, disability rider included. there are only a couple of companies out there offering this product with these free attachments.
    Otherwise, if you are to go with a term, add the return of the premium rider(ROP) which in a case nothing happens to you at the end of the term would pay you back the whole premiums you have piad,( Free life insurance)

  12. Great comparison!
    I didn’t read all the other comments. But, just a reminder. A lot of group insurance is “underwrite at the time of claim”. That means, if you get a “no-questions-asked insurance with high limits and you are in below-average health”, you ough to be very very careful. Insurance company has the right to not pay the benefit.

  13. Many great points were brought up in this discussion. Just to respond to a few of them:

    I believe a group policy is definitely something that employees should take advantage of because it should cost pennies on the dollar to enroll in. BUT an individual policy is vital to have for your financial plan. The reason for this is two fold: 1) if you leave your company the group policy is more than likely not portable (meaning you can’t take it with you) and 2) this could be a problem if you now have health issues and your next employer does not offer you a life insurance option. You are now stuck with no life insurance. Also, group policies are based off your age so the older you get the more expensive it will become. If you have an individual policy, you have the ability to set your premium and keep it.

    Also, on individual policies there are thresholds of coverages where if you break through them you can get a discounted rate for your premium. What I mean is that $100K of coverage should cost less than $90, $250K should cost less than $230K and $500K should cost less than $450K and so on. Reason being is underwriting will do more research on the client at those higher coverages so they know more about them and can offer a discounted premium if they find they are in great condition.

    What a lot of people don’t know is the options that Life Insurance has to offer. As mentioned on an earlier post, there are additional riders that are included in policies at no additional cost. With your Life Insurance policy, you can now include:

    Critical Illness
    Terminal Illness
    Long Term Care

    All in one policy. You can actually get a term policy and have these options included and you can pull from your death benefit while you are living if you were to suffer a heart attack, acquire cancer or be in need of Long Term Care. Life Insurance has evolved.

    My recommendation would be to sign up for Group Life Insurance in order to complete your needs for Life Insurance coverage, but your basis of Life Insurance should come from an individual policy. If you are wondering how to search for an individual policy, I would ask for a recommendation from a friend or family member who has sat down with a Life Insurance Agent so you know you can trust that person. And remember this, you could go online and order a policy, but it will cost you the exact same to sit down with a Life Agent and have them figure out a plan for you.

    In case you are wondering, yes, I am a Life Insurance Agent and I love what I do. I hope this information helps someone out there.

  14. Jenn Riley says

    If you put that premium into a whole life insurance policy it will gain cash value with an interest rate on it! It is worth it to invest in whole life or universal life. Universal life is a fairly new concept but it mixes whole life and term life. You get the benefits of a high benefit amount for a period of time (to pay for a mortgage) and the benefits of building a savings with a good return on it! If you ever have an emergency in the future you can borrow against it and not ever have to pay that loan back!

    Employer sponsored insurance is all owned by your employer-not you. They can cancel the insurance, switch companies, or stop paying their portion at any time. You are not in control of your policy. With an individual policy you are in control and the power to chose where your money goes!

    I am also an insurance agent! lol

  15. Well, these are very interesting things.

    Sean S, I think you reminded me of a very good point of being able to “pull from death benefit” while I am alive. I have Cancer.
    I think if you are an insurance agent I would like to talk with you about some more questions. Plz respond back.

  16. I have term life insurance and just retired. My insurance dropped my husbands coverage once they learned he had pancreatic cancer. I paid them an amount thinking he was part of the coverage. Only to learn that he was not included in my insurance. I retired and filled out a portability application. One of the questions was has your or your husbands health changed in the last two years. So, I answered, Yes!
    My Question is, Did I need to fill out an application? I am not changing insurance or changing coverage. Please help out. I will I do without insurance for my husband now that he is ill with pancreatic cancer.

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