Differences Between Individual and Group Life Insurance

Something can be said for following the crowd, at least when it comes to group life insurance. But if you’re young and healthy, you may find that the cost of an individual life insurance plan can be far more affordable than an insurance plan provided by your employer.

“Group life can cost a great deal more than an individual life insurance policy because individual policies are medically underwritten and the insurance company knows the health of the potential policyholder,”said Brent Fritz, Chief Actuary for the Individual Life Division of Principal Financial Group. “Whereas with a group policy, you are estimating an average or paying for the average life expectancy of everybody in the group. An underwriter can give you a better rate because they know that you’re healthy and you would not be subsidizing the unhealthy members of the group.”

The American Council of Life Insurers (ACLI) reported that Individual life insurance was one of the most common forms of life insurance purchased in 2007, making up 52 percent of the entire insurance marketplace in the U.S., while group life represented 48 percent of the insurance marketplace.

While individual life insurance is a policy you buy on your own, group life insurance is a policy that you buy through an employer. Since group insurers spread the risk among groups of people, if you have a pre-existing medical condition that might otherwise force you to pay a higher rate or be denied coverage in the individual market, this may be the only option for you.  Other examples of  organizations offering group life insurance include members of a union or a professional trade group. In  2007, group insurance was responsible for 9.2 trillion dollars in coverage, a three percent increase from the year before, according to estimates from ACLI.

According to a March 2009 National Compensation Survey by the Bureau of Labor Statistics, when an employer offers group life insurance, at least 96 to 97 percent of workers enroll in the group plan.  Unlike individual life insurance, group life insurance is a “guaranteed issue” policy, which means that medical examinations are not required to get coverage.

When it comes to setting the rate for an individual policy, underwriters consider age, height, weight, current health, medical and family history, occupation and hobbies in order to set the premiums. Once the policy goes through the underwriting process, the price is then subject to your predicted life expectancy, the face amount, and the number of years the policy will be in force, explains Tony Franks, a financial planner for MetLife.

If you enroll in a group life plan you have the option to pay a portion or the entire premium or your employer might pay those costs for you.

Purchased through an agent, group policies can be issued with face amounts that start at 5,000 dollars, but can reach several million dollars depending on the size of the company. Most policies issued to a group are term life insurance, but some companies offer whole life to employees who wish to keep their coverage in retirement. Some policies are also portable, which means you can take the policy with you, and still pay the same price for coverage that you paid as an employee.

Group life term policies are usually basic (they only pay funeral expenses) and often do not provide enough coverage for dependents, but it can be used as a supplemental life insurance policy to permanent coverage.

“Basic term life insurance can make a good supplement to a more permanent policy. It is definitely a good starting point for basic coverage and creates a base for the policyholder,’ said Fritz. “But it’s best to have an expert in the field access their individual needs to determine how much life insurance is adequate.”

A disadvantage of group life is if you leave a job, you typically cannot take your policy with you. Also, the yearly premium you pay for group life depends on certain factors such as the number of employees and the average age of each member of the group. Fritz adds that if someone in your group is diagnosed with a critical illness, this doesn’t necessarily mean the members of the group would have to pay a higher rate for coverage at renewal time.

“A lot depends on the group size, if it’s a very small group made up of 20 employees they may have to pay a higher rate if one of the employees becomes seriously ill, but if you work for a large company one person’s illness wouldn’t have much impact on cost because the policy covers so many people,” said Fritz.

Also, some large companies that offer group term policies allow survivor benefits to be paid monthly to a spouse or children if the former employee should die during retirement. Survivor benefits can be three to 10 times the retired employee’s yearly income, according to ACLI. In addition to the death benefit, group life can also provide disability benefits (if the policyholder should become disabled and have to take time off from work).

There are some other factors to consider as well, especially when it comes to insurability. For instance, if you leave your job or your employer cancels your group life policy, you might have trouble getting a new policy if you have a pre-existing medical condition. In some instances, you have the option to convert your group life policy to an individual life insurance policy if you leave your job, but it can be more expensive because of your age and health status.

“This varies by company, but you can potentially convert a group policy to an individual contract under certain circumstances,” said Fritz. “The cost might be the same as you were paying for your group policy, but you can only convert the face amount to the same amount or less than what you carried on a group policy. If you had a face amount of 100,000 dollars on your group policy, you could convert the policy’s face amount to 50,000 dollars or more on an individual policy, but not 150,000 dollars.”

Fritz explains that the reason for this is to protect the other members of the group from being hit with unexpected cost increases on their life insurance policy.

“This is to prevent someone who knew they were ill or terminal in the group from trying to convert or greatly increase coverage without paying an additional amount,” said Fritz.

Purchased by individuals to cover their family in the event of their death, individual life insurance policies are also taken out by companies to protect a business from the financial losses that would result in the event a “key person” such as the owner or CEO dies.

Keep in mind, there are more options to choose from when you purchase an individual policy that are generally unavailable to you under a group term life policy; such as long-term care riders, child and spouse riders and an accelerated death benefit.

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