Only 52% of Americans have life insurance, and only a quarter get life coverage through their employer. If you are able to get group life insurance from your company should you? Is the free group policy your employer provides enough coverage for you? What are the differences between group life insurance vs. individual life insurance?
Unfortunately, group life insurance typically isn’t enough coverage for most people. This means nearly 3/4s of Americans don’t have adequate life insurance coverage. In this post, we will compare group life insurance vs individual life insurance so you can know the difference.
Key Takeaways:
- Both group life and individual life insurance pay a death benefit upon your passing to a named beneficiary
- However, employer-provided group life is typically less coverage than you need and if you pay for additional coverage it is expensive if you are in better than average health
- Individual life insurance gives you much more flexibility and isn’t tied to your employer, but you will need to go through medical underwriting to qualify
- Group life insurance is a nice employment perk but getting adequate coverage through individual policies is still needed
What is Group Life Insurance?
Group life insurance is offered to a group of people, typically employees at a company or members of a group. Most larger companies offer group coverage as part of their benefits package and some even pay for the cost of a policy. When your employer buys some group life insurance for you, you often have the chance to add additional coverage through a payroll deduction as well.
Group coverage through an employer is generally only there for the time you are employed. Your employer enters into the contract with a group life insurance company and gets a rate for the employees. You pay the employer rate.
If you change jobs or get let go, you often lose this protection. Although some group policies allow for you to convert it to an individual policy.
Group life insurance will have the same price for all similar members in the group. Each year the group insurance provider will re-rate their policy based on experience and members of the group have the option to renew for another year.
However, this means the price you pay is based on the average health of the members of the group who have coverage. If you are healthier than average, this means you are ‘overpaying’ for the coverage amount.
What is Individual Life Insurance?
Individual life insurance is coverage you purchase on your own. Individual life insurance can be permanent like whole life insurance or for a specific period of time which is term insurance.
When you purchase an individual life insurance policy, you get to choose the coverage amount, the length of coverage, type of product, and any additional riders.
Additionally, individual life insurance requires underwriting. This is the process where you answer a questionnaire and see a medical provider so the insurance company can asses your risk. The healthier you are the better health class rating you get and lower premiums you pay for the product. (We cover the underwriting process in our beginners guide to life insurance here).
Group Life Insurance Vs. Individual Life Insurance
Despite both group life and individual life insurance providing a death benefit upon your death, there are some major differences between the two. So how does group life insurance compare vs. individual life insurance?
For one, group life does not require underwriting. You get the same rate as all similar aged & gendered people at your company. Whereas with individual life, you go through the process of assessing your individual health risks. Group life can be good if you are below average health, but also means you pay more for coverage if you are healthy.
Group life is also only available while you are employed at the company or a member of the group. It isn’t portable like an individual policy that stays with you as you change jobs. (Although, group life insurance oftentimes has the option to continue your coverage after leaving your employer, for a high cost.)
When you get group life, it is typically for a multiple of your annual income. Often your employer will cover some amount of coverage and you are eligible to purchase more, up to a limit. However, with individual life insurance you can elect to purchase as much insurance as you can afford or want.
Group life is typically an annually renewable policy and each year your premium rate will change. You elect to enroll in your group life policy during annual enrollment when you elect your other benefit options for the year. Individual life insurance typically has either a set term or coverage until you die. And the premium you pay over the life of the policy is generally uniform, meaning you pay the same amount every year.
Lastly, group life insurance is fairly vanilla with little options to choose. There are many types of Individual life insurance. And each company offers its own differentiated version of a product with additional riders for increased flexibility.
Is Your Group Life Insurance Enough For You?
Probably not.
Group life insurance paid for by your employer typically is a small flat amount or the equivalent of one year’s salary. This is significantly less than what is commonly recommended. When figuring out how much life insurance coverage you need, there is 5 main methods. The most simple is 10-15 times your annual salary. This means your employer-provided group life insurance coverage is 90%+ less than you likely need.
Getting employer-paid group life is a nice perk, but not sufficient.
The Benefits and Drawbacks of Group Life Insurance
There are benefits and drawbacks of group life insurance.
Pros of Group Life Insurance:
The main benefits of group life insurance are:
- A basic amount is free at most employers
- There is no underwriting and everyone in the group qualifies
- If you are below average health, it can be the cheapest way to get additional coverage
- It is convenient to sign-up for as part of your annual enrollment
- Some group life is portable and allows you to convert it to an individual policy if you lose your job
Cons of Group Life Insurance
Group life insurance does have a material amount of downsides to it:
- It is tied to your employment, meaning if you lose your job you lose your coverage
- The free coverage is insufficient for most people
- Buying additional coverage is expensive if you are above average health
- They typically are annually renewable and the price of additional coverage goes up every year
- Converted group life to an individual policy tends to be very expensive and has many restrictions
The Benefits and Drawbacks of Individual Life Insurance
Individual life insurance is a critical asset for most people. It is a key part of the protection assets under the 5 pillars of personal finance.
Pros of Individual Life Insurance
The many benefits of individual life insurance are:
- Can choose the amount of coverage and type of product that is right for you
- It stays with you regardless of your place of employment
- You can add optional riders to customize it
- Healthier individuals can get significantly cheaper rates
- It can be permanent coverage meaning you have it no matter how long you life
- You don’t lose it if you get fired
- The cost of the policy is the same year after year
- There are many types of individual life insurance to fit your changing life insurance needs throughout life
Cons of Individual Life Insurance
However, there are some downsides to purchasing individual life insurance:
- Require underwriting and often includes seeing a medical professional and a blood draw
- You can be denied if you are very unhealthy
- Smokers/nicotine users will get worse pricing
- Can be confusing as there are many types of life insurance available
- Individual life may be more expensive than group coverage when you are young, but it doesn’t increase over time
The Final Word
There are at least 15 reasons to buy life insurance and having some group life insurance coverage is better than nothing. But if it is the only life insurance you have, you are likely underinsured. Sure you could purchase supplemental group coverage, but it tends to be expensive, especially if you are above average health.
Therefore, you should also purchase individual life insurance to protect your loved ones. Using a buy term & invest the difference (BTID) strategy and structuring your purchases as a term life insurance ladder is a cheap way to get coverage while leaving flexibility. And if you have a term conversion rider, you can convert some or all of those term policies to permanent cash value life insurance.
When comparing group life insurance vs individual life insurance, it is clear that group coverage can be a nice perk, but most of your life insurance should be coming from individual policies.
Frequently Asked Questions (FAQs):
Group life insurance is offered to a group of people, typically employees at a company or members of a group. Most larger companies offer group coverage as part of their benefits package and some even pay for the cost of a policy. The policies will be the same price for all similarly aged members of the group, which means if you are above average health, you would be over-paying.
Individual life insurance is coverage you purchase on your own. Individual life insurance can be permanent like whole life insurance or for a specific period of time which is term insurance. When you purchase an individual life insurance policy, you get to choose the coverage amount, the length of coverage, type of product, and any additional riders. Additionally, individual life insurance requires underwriting.
Group life insurance is typically offered as a perk to employment for a small coverage amount with the option for the employee to purchase more. It tends to be more expensive for a healthier person as everyone gets the same group rate. However, you get to avoid underwriting which is a benefit if you have pre-existing conditions that make getting an individual policy difficult.
Probably not. Group life insurance paid for by your employer typically is a small flat amount or the equivalent of one year’s salary. This is significantly less than what is commonly recommended. When figuring out how much life insurance coverage you need, there is 5 main methods. The most simple is 10-15 times your annual salary. This means your employer-provided group life insurance coverage is 90%+ less than you likely need. Getting employer-paid group life is a nice perk, but not sufficient.