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.
Life insurance should be thought of as a way to offset financial liabilities should the worst happen. Whenever you have a life event that adds financial responsibilities, it’s a good time to consider acquiring coverage or adding to what you have today. Let’s take a look at what some of those life events might be.
When you get married, you start making financial decisions based on your combined income. You may be a dual-income household, or perhaps only one of you works outside of the home. If something happens to either one of you, the other spouse would likely not be able to maintain your current lifestyle without either the other income or the household and childcare help. Life insurance can be a way to offset this.
Having children means high hopes for their future. For many, this means the ability to send them to college. However, if one or both parents weren’t around to provide this support, it may make going to school difficult financially. Life insurance can be a way to make sure the money is there for this important aspect of your child’s future should you not be there to help pay for it.
Buying or Upsizing a Home
Buying a home is a way to put down roots. It’s generally a long-term commitment that comes along with a mortgage. Most families buy because they want their family to establish memories in a particular area and live a certain lifestyle. Again, this might be difficult to maintain on a single income. Whether you are purchasing your first home or upsizing, it’s a good time to look at your coverage.
Getting a Big Promotion
When there’s a big change in the amount of money coming in, it’s a good time to revisit your coverage. As much as we all like to think we’ll maintain the same lifestyle on a larger salary, the reality is that we tend to increase our expectations and financial commitments. Perhaps you buy a bigger house or a new car. These are new financial obligations and income that your loved ones will come to count on. Increasing your coverage can make up this gap.
When You’re Young
Life insurance premiums are based on age at entry and that means the sooner you buy, the less you’re going to pay. With policies that have 10 or 20 year terms, the savings to you could be substantial. Another reason to buy young is that you never know what your health situation will be when you’re older. Health issues may crop up that make securing coverage at an older age difficult or more expensive.
In short, whenever you have life circumstances that either add to your income or add to your financial obligations, it’s a great time to review your coverage. Don’t forget about looking at your beneficiaries at the same time.
- The offer doesn’t require an application and states that you cannot be turned down for coverage.
- An offer with a series of around 3-5 short questions, typically requiring a “yes” or “no” answer.
- An offer that includes a full application.
The first scenario is what’s called “guarantee issue.” If the product is individually underwritten, you may pay higher rates due to the increased risk to the insurance company. In a group plan (such as through an association), the rates are normally unchanged. In a plan such as dental or vision, it’s very common for the plan to be guarantee issue at all times. For life or disability insurance, these offers are usually only offered at very infrequent intervals – maybe only once every other year. These offers can be to add onto your existing coverage or to start a new policy. It can be a quick and simple way to add to your insurance portfolio with minimal effort.
The second scenario, with several “yes” or “no” questions is “simplified issue.” These questions are often referred to in the insurance world as “knockout questions” because the insurance company may consider a “yes” answer to any of the questions as disqualification for coverage. This isn’t always the case though. Certain “yes” answers may be okay or it may trigger additional underwriting activities.
Lastly, when you receive a full application, this is called “fully underwritten.” In some cases, the application information will be enough for the insurance company to approve or deny your coverage. More often than not though, they will have a paramed appointment set up with you where the company will come to the location of your choice and collect blood and/or urine samples. For very large policies, you may also have to go through financial underwriting to prove that the policy isn’t unreasonable in comparison to your assets. For instance, if you make $30,000 annually, the company may not approve a $2 million policy. It’s important to note that the fully underwritten process can take a bit of time to complete; thirty to ninety days is not completely unheard of.
We hope that this blog helps you to understand the different types of insurance offers you may receive. Of course, if you have additional questions, please feel free to comment, send a message or call us.