Group Life Insurance vs. Personally Owned Life Insurance
Is it better to own my own life insurance policy or purchase extra group insurance through my employer? That’s a question I hear often in financial planning. The answer? It depends.
As part of an employee benefit package, many people have the opportunity to purchase additional group life insurance through their employer. Some automatically purchase the insurance without thinking twice. That’s one benefit of group insurance, it’s easy. Another advantage is that you don’t have to personally go through underwriting. You may be asked if you are a smoker or not, what your age and gender are, and that’s about it. You choose the amount of additional life insurance that you’d like to purchase and the premium is automatically deducted from your paycheck. If your health or lifestyle choices are not that great, chances are you’ll get a better rate than you could with an individually owned life insurance policy since you’ll pay the “group” rate and not an individual premium rate. In other words, those who are higher risk due to health or lifestyle tend to fare better than their colleagues who are low risk and healthy given the same age, gender and tobacco status, since they will pay the same group rates.
Therefore, as you’d likely guessed, an individually underwritten and owned policy can be less expensive if you are in good health and lead a lower risk lifestyle. You also have the option to choose term or permanent coverage, locking in the length of time that your premium is guaranteed not to rise. Say you choose a 30 year term policy; the insurance company contractually guarantees that your premium will not go up for 30 years! All policy guarantees are based upon the claims paying ability of the issuer. Consequently, if your health or lifestyle improve, most companies actually allow you to apply for a rate reduction. Therefore, you have no surprise increases in your rates with an individually owned policy. When you personally and individually own your life insurance, it is also not dependent upon your employment with a particular company. Truly, you own the policy.
Some employers will offer to pay for a substantial amount of group life insurance for their employees as part of their benefits package. What many people don’t realize though is that IRS considers the premium paid by the employer for any death benefit over $50,000 to be a form of compensation to the employee, called “imputed income”. The employee is taxed on the imputed income, even though they never received the money. Do the math and run comparisons if this applies to you. I’ve had instances with clients where they earn a nice income which puts them in a higher tax bracket, they are healthy and their employer offers to pay for a substantial amount of group life insurance for them. When we’ve done the comparison, the tax alone that they pay on the imputed income for the group coverage has actually fared to be MORE than if they would not accept the employer paid premium, and bought an individually owned policy for the same amount of death benefit paying the premium for themselves, since they qualified for better rates through individual underwriting.
The most important factor of your life insurance is having the proper amount in place. The best way to obtain the coverage depends upon your individual circumstances which can extend even beyond your age and health to details like your income and tax bracket. If you are considering individual insurance, do it now for the opportunity to lock in the best rates. It’s not often that I get to use the word “guarantee” in my line of work, but here is one time. Life insurance premium is less expensive the younger you are and the healthier you are. Chances are you will not be healthier than you are right now, and I can guarantee that you will never be younger than you are right now.
LouAnn Schulfer of Schulfer & Associates, LLC Wealth Management can be reached at (715) 343-9600 or louann.schulfer@lpl.com. SchulferAndAssociates.com , louannschulfer.com or louann.biz
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices.
Guarantees are based on the claims paying ability of the issuing company.
