Defined Benefit Plan

What Does Defined Benefit Plan Mean?

A defined benefit plan is a method for employers to provide benefits to their employees. Under these plans, the benefits an employee receives are based on factors such as salary history and length of employment. In the context of insurance, employers often offer health care benefits through a defined benefit approach. Employees without access to an employer plan can shop for health insurance on their own. Additionally, defined benefit plans can be combined with life insurance as part of retirement planning. Permanent life insurance fits this role well because it builds cash value the employee can draw on in retirement.

Insuranceopedia Explains Defined Benefit Plan

Defined benefit plans are an alternative to defined contribution plans. With defined contribution plans, employers make contributions on behalf of their employees at specific intervals, and the benefits employees receive depend on the performance of these contributions. In contrast, defined benefit plans guarantee specific benefits to employees. Essentially, defined benefit plans provide predetermined benefits, while defined contribution plans allow employees to manage the contributions themselves to fund their own benefits. The benefit from a defined benefit plan usually pays out as a pension, which is a type of annuity paid over the retiree’s lifetime. Both types of plans are designed to enhance employee incentives by offering more than just a salary.