Group Life or Individual Life Insurance: Understanding the Difference
Group life or individual life, that is the question. To many people, life insurance is a big mystery dealing with a subject that they would rather not even think about in the first place. Unfortunately, ignoring that issue won’t make it go away. So, they default to the easiest path, and just rely on their employer to take care of it for them. But is that really the “best” answer for them?
Group Term Life Insurance
Most employers in the US provide a base amount of life insurance for their employees as a basic benefit at no cost to the employee. Commonly, it equals your annual income up to $50,000. This is due to IRS rules which count premiums for benefit amounts above that level to be taxable to the employee. And there is usually an option when you first become benefit eligible, to increase that amount to certain limits at your own expense without having to show proof of good health. That is incredibly valuable to someone with a health condition. As they might otherwise not be able to qualify for any sufficient life insurance coverage that’s affordable.
Advantages:
- Coverage and cost. Group term life insurance offers coverage for a specific period, usually one year, and is renewable. The premiums for this type of insurance are typically lower compared to individual owned life insurance because the cost is spread across a larger pool of participants.
- A big advantage of group term life insurance is that it often does not require a medical exam for coverage. Eligibility is based on being a member of the group, such as an employee of a company or a member of a specific association. This can make it a convenient option for individuals with pre-existing health conditions.
- Ease of enrollment. With there being no medical underwriting to worry about, enrollment can be as simple as clicking a box on your enrollment portal and naming a beneficiary. Your coverage will usually be in force beginning the first day of the new plan year. Or the first day of eligibility if you are a new hire.
Disadvantages:
- Portability. One limitation of group term life insurance is its lack of portability. When you leave the group, such as changing jobs, you may lose your coverage. However, some group policies offer the option to convert to an individual policy, albeit at a potentially higher cost.
- Lack of control. With group coverage, it is the employer who owns the policy not you. They decide who’s eligible, what the coverage limits are, and which carrier will provide the coverage. The employer can make unilateral changes to these at any time.
- Lower death benefits. Group policies may not offer as much coverage as you need. Commonly group life coverage may have a maximum amount of available coverage that isn’t enough to meet your needs, even with proof of good health.
- It can go up. Most group health plans are priced by your age at the beginning of each plan year. This means the cost of your group coverage will increase as you get older. Most policies have age “tiers’, where the premium are level until you reach the next age bracket.
- Coverage reductions at age 65. If you are relying on your group coverage as you age, keep in mind most group life policies will reduce your benefit amount when you reach a certain age, 65 for example. There will likely be another reduction to 50% at some point after that, if you are still working.
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Individual Term Insurance
Individually owned life insurance, as the name implies, is a policy you purchase independently. Here are some key points to consider:
Coverage and cost. Individual term life policies provides coverage for a specific period of time or your entire life, depending on the type of coverage you choose. Premiums for policies are typically higher than those for group term life because they are based on individual factors such as your age at the time of application, overall health, and lifestyle choices.
Customization. One advantage of individual life insurance is the flexibility you have in customizing your policy to address your specific needs. You have the flexibility to choose the amount of coverage, duration of the rate guarantee, and additional riders or benefits you may need.
Portability. Unlike group term life, you own the policy. Your coverage is not predicated on you continuing to work for the same employer. So, it remains in force regardless of changes in employment or worker status. This gives you peace of mind in knowing your coverage is not at risk due to planned or unplanned changes in employment.
Which is Best? Individual Life Insurance or Group Life Insurance?
Both group term life and individual policies provide valuable protection but have distinct differences. Group term life offers low-cost coverage while you’re working for a particular employer, often without a medical exam. While individual coverage allows customization and portability. The good news is that it doesn’t have to be a choice of one over the other. There are no rules or regulations that stop you from having both. In fact, most financial planners embrace the strategy of a blended approach. Your primary coverage should be a policy that you own and customize to your specific needs (see article – Do I Need Life Insurance?). Then use the group term coverage your employment offers to supplement that.
Get the peace of mind knowing your family’s future is taken care of.
Apply online for real suggestions and premium rates. Most policies issued in less than an hour.