It Doesn’t Have to Be Either/Or
Typically, employer policies are small (for instance, 1-2x salary for a life insurance policy – which isn’t nearly enough coverage for most people) and you don’t have to go through underwriting unless you’re looking for a larger amount. Premiums are usually paid on a pre-tax basis. In other words, securing this coverage is pretty quick and painless. It’s worth considering for this reason. You can then supplement this coverage with a policy outside of your employer. While most don’t realize it, your professional or alumni association can be a good source for these policies.
If you have medical conditions that make you believe you might be turned down for an outside policy, an employer plan is a very good option for at least securing some coverage.
The Downside to Employer Policies
Your Employment Isn’t Usually Forever
First and foremost, there is no guarantee you’ll be with your employer forever. These policies almost always terminate when you leave the company. If you’ve been with the company for a while, health issues may have crept up that make getting an individual policy difficult.
But What if It Is
If you retire at age 65, chances are you’ll still want to have a policy in place, but your coverage may terminate with retirement.
The Tax Man Cometh
In the case of disability coverage, employer plans present an interesting (and not so pleasant) quirk. You’ve paid for your premiums with pre-tax money and let’s say the benefit is 60% of your salary, which is about the norm. Sure, living on 60% of your salary would be tough (particularly if you’re paying on medical bills relating to your disability), but it’s reasonable to think it’s doable. But wait…there’s untaxed money out there and now is the time that the tax man cometh. That’s right, your 60% of salary benefit will be taxed – meaning you’ve got much less to live with than you may have counted on. This is not usually the case with disability policies secured outside of the employer environment because the policy was paid for with money that’s already been taxed. This allows you to realize the full benefit amount (in our example here, 60%).
You Could Probably Do Better
Since any employee can secure coverage without underwriting, there’s a chance these rates aren’t the best you can get. Underwriting ensures you’re a good risk and therefore, rates are usually less expensive when you have to go through it.
Only you know your exact circumstances and if any employer plan, external plan or both are right for your situation, but we hope this post helps you understand the differences so you can make an informed decision.