Difference Between Group & Individual Life Insurance

Updated

One objection life insurance agents regularly hear when they approach prospective clients is, “I’m not interested; I have group life insurance where I work.” That sounds like a tough objection to overcome until you understand how both types of life insurance work.

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If you have group life insurance at work, or you’re about to enroll, this article will shed some light on what the pros and cons of group life insurance are, and perhaps give you a better understanding of the pluses and minuses of traditional individual life insurance are.

Let’s begin with a brief overview of both.

Overview: Group vs. Individual Life Insurance

When you pass away, the beneficiary on your life insurance policy isn’t going to ask the life insurance company, “Was that a group life insurance policy or an individual life insurance policy?” All that will matter to them is the amount of the death benefit they’ll be receiving, which is why you bought life insurance: to meet their financial needs.

However, by not selecting the right type of life insurance, you could be short-changing your loved ones if they ever need to file a claim. What the right type of insurance is can be different for different people. Let’s look at two types: group life and individual life insurance.

Group life insurance

It’s estimated that nearly 30% of Americas only carry group life insurance. Group life insurance doesn’t accumulate any cash value, like whole life or universal life, and there’s a limit to how long you’ll be covered, which is usually until your employment with the company ends.

Group life usually has less or no underwriting and typically goes into effect the day you sign the application. If you die while the policy is in place, your beneficiaries will receive the death benefit.

Individual life insurance

Individual life insurance is usually one of two types of life insurance: term life or permanent life insurance. Term life accumulates no cash value; it involves a death benefit only. Permanent life insurance has a death benefit element, but it also accumulates savings in the policy, called “cash value.”

With individual life insurance, you can keep the coverage for your entire life, as long as you keep making the payment (premium). The beneficiaries you named will receive the death benefit when you pass away.

Group vs. Individual Life Insurance: Payouts or Payment Schedule

The payouts are a bit different with group life and individual life insurance.

With group life, when you die you typically have only one option: the insurance company typically pays your beneficiary the death benefit in one lump sum, which they receive tax-free.

If you own an individual life insurance policy, there are several different ways that the death benefit can be paid out to your beneficiary:

  • Lump-sum fixed amount: With this payout option, your beneficiaries receive one check for the entire amount of the death benefit. This is the option most people choose, but it does carry some risk with it if the person receiving the money doesn’t manage it properly.
  • Specific income payout: Often referred to as “the spendthrift clause,” your beneficiaries will receive monthly installments over a pre-determined period of time. This ensures they don’t spend the death benefit too quickly. 
  • Retained asset account: This option works like a checking account. When a death benefit is paid to the beneficiary, the proceeds are deposited into an interest-bearing account. They receive a checkbook, and if they wish, they can write checks against the account. The portion of the money they withdraw that is interest is taxable, but not the amount that comes from the death benefit. 
  • Annuity: The annuity option guarantees payment installments for as long as a beneficiary lives. The payment amount is calculated using the beneficiary’s age when the death claim is filed. If this option is chosen and the beneficiary dies before all of the death benefit is paid out, the insurance company will keep the remaining amount.

Group vs. Individual Life Insurance: Costs

Individual and group life insurance are priced differently.

When life insurance companies price an individual policy, they use rates that have been determined by employees called “actuaries.” Actuaries perform complex calculations based on many variables to determine what the cost of insurance will be for a particular insured individual.

For example, the price of a $100,000 policy for a 35-year-old female will be different than it is for a 35-year-old male. The female’s premium will be lower because she has a longer life expectancy than the male.

Group life insurance policy costs are also determined by actuaries, but group life premiums are “banded,” meaning that rates are determined by age group, not individual ages.

For example, a group policy may offer one premium rate for all females and males aged 35-39, with the rate for the employees aged 40-44 being higher than their younger counterparts. Premiums rise exponentially as an employee passes through the different age bands.

Generally, the cost of group life is lower than that of individual life insurance. The primary reason is that the financial risk for the insurance company is lessened by the fact that there are other employees in the same age band as an employee who passes away.

The cost for group insurance is also lower because the face amounts are usually lower than they are for individual life policies. Group life typically limits the amount of coverage an employee can have to $50,000 or a multiple of their salary, usually 1x or 2x. Exceptions are sometimes made for managers and executives, who can buy a higher death benefit amount than other employees.

Group vs. Individual Life Insurance: Who Are They For?

An excellent candidate for group life insurance would be someone with serious pre-existing medical conditions, such as cancer, heart attack, uncontrolled high blood pressure, or diabetes. 

Group life insurance companies usually don’t ask any medical questions to people applying for $50,000 or less of coverage. So a person who wouldn’t be approved if they applied for an individual policy could be approved for a group life policy.

The reason: individual life insurance companies fully underwrite their policies, meaning that applicants are required to answer medical questions and often undergo a medical examination for higher face amounts.

There are exceptions to this. For example, individual “guaranteed issue policies” are not medically underwritten; anyone who applies for the coverage is issued a policy (although face amounts are limited).

Individual life insurance is beneficial for anyone who has other people who are financially dependent on them. Death benefits paid to beneficiaries help pay off mortgages, fund college educations, provide money for the person responsible for funeral costs, and much more.

Pros and Cons of Groups vs. Individual Life Insurance

Each type of policy has strengths and weaknesses. Let’s look at group life insurance first.

Pros of group life insurance

  • Convenience. When you buy group life insurance, you don’t have to meet with an insurance agent on your own time. You can simply fill out the paperwork provided by your HR department when you’re hired or during the open enrollment period.
  • Price. Basic coverage is usually free for the employee, which makes it an easy way to get a small amount of coverage at a low cost.
  • Acceptance. Most basic group life insurance plans are not medically underwritten, which guarantees you coverage up to a set amount. And some supplemental life insurance plans allow you to purchase additional coverage without evidence of insurability.

Cons of group life insurance

  • Not portable. It’s most likely that if you leave your employer, you’ll be leaving your life insurance protection behind. Some group policies do offer departing employees the option to convert their policy to an individual policy, but it can be cost-prohibitive if you’re older and you buy individual life insurance this way.
  • Limited choice. When you buy group life insurance at work, you have one insurer to choose from and one type of policy. It’s not what you would call flexible. 
  • Low coverage amounts. There are set limits to how much group life insurance you can apply for, and it may not be adequate to provide for your loved ones when you die.

Pros and cons of individual life insurance

The pros and cons of individual life insurance are the reverse of group life insurance:

  • Pros: No problem with portability; many insurers and policies to choose from; and unlimited coverage amounts.
  • Cons: Not convenient (you have to complete lengthy applications and undergo medical exams for higher face amounts); cost is higher than it is for group life; almost no policies will guarantee coverage when you apply for it.

Should You Get a Group or Individual Life Insurance? 

If you have group life insurance as a benefit at work, it’s usually free and you should apply for the base amount. It’s also advisable to buy group life if you have pre-existing conditions and can’t get approved for an individual policy.

You should typically buy individual life insurance whether you have group life insurance or not. If you rely on your family being protected by what’s probably a temporary policy for you (Americans change jobs about every four years), you’re placing their financial security at risk.

If you can, get both. Buy an individual policy that you’ll be able to keep for the rest of your life without the rates ever going up, and supplement it with group life insurance through work. You’ll be able to have the best of both worlds.

Need Help Deciding?

If you’re still unsure which type of insurance you should buy, consult an independent financial planner who can give you unbiased advice, usually for a small fee. It’s money well spent and will help you feel at ease when it comes to protecting your loved ones.


Source: 

1. Kolmar, Chris. “Average number of jobs in a lifetime [2021]: all statistics.” Advice, Zippia, 19 May 2021. Zippia.com

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