Group Life Insurance Vs Individual Life Insurance

Jun 18, 2021 | Personal Insurance

Many working people think that company-sponsored plans are enough to financially protect them. Having employer-provided life insurance is one of the best benefits a worker can get. Company-sponsored plans are good, but the coverage is often not enough. It is still best to supplement it with individual life insurance. Knowing the differences between individual life insurance vs. company-sponsored plans will prove the absolute need for individual life insurance.

Difference Between Individual and Company-sponsored Life Insurance Policy

There are some significant differences between individual and group life insurance coverage. These differences have a huge impact on an individual’s financial needs, goals and security. 

Pricing

Many people think that group plans are way cheaper than individual plans. Individual plans are calculated based on various factors. Many people do not realize that they can get better individual life insurance rates until they get a proper quote. Healthy individuals, especially the younger ones, could get affordable low rates upon quotation.

Portability 

Employer-sponsored life insurance depends on the continuity of employment while individual life insurance will continue as long as you pay your premiums. As life is full of uncertainties, it is difficult to rely on your employer-provided life insurance alone. Group plans are beneficial but it’s not guaranteed. That’s why it is always recommended to have a supplemental individual plan.

Flexibility

Individual life insurance offers the freedom to determine the financial protection you need based on your economic, personal, and health necessity. Group plans do not have the flexibility to accommodate everyone’s needs. The stipulations and provisions of group life insurance policy are often standardized and one-size-fits-all. This could pose a problem as not everyone has the same financial and protection needs.

Coverage

As the company-sponsored policy is standardized, it usually doesn’t provide enough coverage for your financial needs. Employers often get a low coverage plan as they shoulder most of the expenses of life insurance plans. Individual life insurance provides a policy specifically designed to meet your financial needs and budget. Individual policyholders can opt for the maximum face amount limit if they wish to.

Options

Companies typically cut a deal with a single insurance provider. This will limit the range of policy options and coverage you can choose from. Individual life insurance gives you the freedom to compare coverage options from various insurance providers.

Application Acceptance

Most group life insurance policies do not require a medical examination. That’s why it is easier to obtain group plans than individual plans. Individual life insurance policies require medical underwriting, making the application process more tedious and harder. However, this makes it more beneficial for healthy people, especially young ones. As individual plan pricing is health-based, young and healthy people can avail lower premium rates.

Optional Riders

Company-sponsored plans are a one-size-fits-all policy. It may not have the option to add riders while individual life insurance policies can be customized. Insurance providers offer optional riders to meet client’s demands and needs.

Maximum Face Amount Limit

As employer-provided life insurance is standardized for all employees, it usually has low coverage limits. Individual plans are customized to meet client’s needs and requirements. The coverage limit for individual life insurance policies will be based on the client’s preference.

Cash Value

Cash value is an interest acquired from the life insurance policy. Employers often provide a term life insurance policy for their employees. The main difference between term and permanent life insurance is the cash value element. Permanent life insurance policies have a cash value element while term plans don’t have.

Guaranteed Premiums

Company-sponsored life insurance policy premiums are typically calculated based on the company’s number of covered employees and the nature of risks. Group life insurance premiums can change depending on the employer, the number of employees, and company experience. Individual life plans like a permanent life policy offer a guaranteed premium.

Figuring out the difference between group and individual life insurance coverage is not enough. It is also necessary to determine all the vital aspects of life insurance. This will help everyone in deciding what kind of life insurance fits them best. 

What is Life Insurance?

Life insurance serves as a financial backup plan. In this world where everything is uncertain except death, it pays to be financially secured. Life insurance will give your family financial support in case of unexpected events. Untimely death, accident, and retirement can cause a huge blow to your family’s financial income. Life insurance will protect them against these unexpected events.

Benefits of Life Insurance

Freedom from Financial Liabilities

Most people acquire various debts throughout their lifetime. In most cases, debtors don’t carry their debts with their death. Under Colorado Law, cosigners are legally responsible for the debt left behind by the deceased. The death benefit from the life insurance policy can cover the financial liabilities left behind by the policyholder.

Most common debts people accumulate:
  • Mortgage
  • Student loans
  • Car loans
  • Credit card balances
  • Final medical expenses
  • State and federal taxes

Income Replacement

Most people think that life insurance is only beneficial in the event of death. Many people don’t realize that there are various types of life insurance policies. An adequate term life insurance coverage can be an effective retirement plan.

Financial Support for the Family

Life insurance policyholders can continue providing financial support for their family even up to death. The beneficiaries can use the death benefit to support their living expenses. 

End-of-life Expenses

Death is always accompanied by end-of-life expenses like medical bills and funeral expenses. Life insurance will protect your family from the financial burden associated with your death.

Business Protection

Life insurance can be set up as a buy/sell agreement between business partners. This can help provide financial security to both business partners. In the event of the sudden demise of the business partner, the remaining partner can buy out the share of the demised partner. This is also beneficial to the family left behind by the demised business partner.

Peace of Mind

Having life insurance gives you a certain level of peace of mind. Life insurance gives a sense of financial security. It takes away the worries of what will happen to your family in the event of your death. 

Loan Options

Some life insurance policies allow policyholders to take out policy loans in case of financial needs. The loan cost can be deducted from the accumulated cash value or sum assured of the life insurance plan.

Investment

Life insurance is a good form of investment. It offers a good return on investment as it provides bonuses and coverage for risks. Some life insurance plans have cash value features where your premiums can earn interest. 

Tax Benefits

Under the Income Tax Law, policyholders can file life insurance premiums as tax deductions.

Who Needs Life Insurance

As the future is uncertain, everyone is encouraged to get life insurance. It is particularly beneficial for people with family and dependents as it provides financial backing in the event of death. Here is the list of people who will greatly benefit from securing life insurance:

Parents with young children

As parents, we want to make sure our children are safe and secure. Securing life insurance will guarantee financial support for your young children until such time they can provide for themselves.

Parents with disabled children

People with disabilities often need assistance and life-long care. Life insurance will ensure children with disabilities will have financial resources to meet their needs if their parents suddenly pass away. The death benefit from life insurance can be set as special needs trust. The special trust will be managed by the parent’s assigned guardian.

Seniors without savings

It is never too late for older people to get life insurance. Seniors who don’t have enough savings can avail of low coverage life insurance enough to cover funeral and cremation expenses.

Persons who have joint properties

Whether married or just living together, a partner’s sudden demise could significantly affect financial stability. Owning a property often comes with a loan, maintenance, and tax payments. Life insurance can help pay for those expenses.

Old parents who want to leave an inheritance to their children

Adult children often take care of their elderly parents until their death. Most elderly parents want to give back to their children. Life insurance can serve as an inheritance for the beneficiaries of policyholders.

People with private student loans and co-signed parents

Most people acquired student loans to finance their education. Student loans are often co-signed with parents. Co-signed parents are legally responsible for their children’s student loans. Life insurance will pay for the liabilities left of the policyholder.

Young adults who want to avail themselves lower premium rates

Younger and healthier people are eligible for lower insurance premiums. If you have financial goals, it is better to secure life insurance as early as possible. 

Wealthy people who expect estate taxes

Inherited properties are subjected to estate taxes. Though most US states do not charge inheritance tax, inherited properties with an exceeding value of $11.8 million are subject to federal estate taxes. Life insurance can serve as a fund to cover the estate tax expenses.

Businesses with indispensable employees

Business owners can secure life insurance for key employees like the CEO. The death of a vital employee can cause financial difficulty to the company. The death benefit can support the business in the event of a financial crisis associated with the key employee’s demise.

Married pensioners

Retired pensioners can avail pension maximization. This is a retirement plan where married pensioners avail of two retirement products: life-only annuity and life insurance. A life-only annuity provides a maximum limit payout for one person but ceases upon the person’s demise. The life insurance will provide financial support to the remaining spouse.

Types of Life Insurance Coverage

There are various life insurance coverages to choose from. It comes in different types to meet client’s protection needs and preferences.

Term Life Insurance

The most economical and simplest type of life insurance coverage. Policyholders have the option to choose the specific coverage term of the policy. This policy has common coverage terms of 10, 20, or 30 years. There are also variations of the policy you can choose from such as:

Group Term Life 

This type of insurance covers a group of employees in a single contract. The policy covers the employees of an organization, but the ownership remains with the employer. The employer typically pays the largest or whole portion of the premium.

Level Term

This policy has a specific term period varying from 10 to 30 years. The death benefit and premiums are fixed throughout the policy term. Level term premiums are more expensive than yearly renewable terms.

Yearly Renewable Term

This policy has no specified term and is renewed yearly. Premiums also change year by year along with their renewal. As the insured’s age increases, so does the premium. 

Decreasing Term

In this policy, the death benefit decreases every year as it reaches the predetermined schedule. The premium is fixed for the whole duration of the policy. This policy serves as a mortgage life insurance as its benefits match the corresponding mortgage balance of the policyholder.

Return of Premium

This policy has a built-in savings structure. The premiums paid by the insured are refunded at the end of the policy period if the policyholder is still alive. If the insured dies within the duration of the policy, beneficiaries are entitled to the standard term death benefits.

Permanent or Whole Life Insurance

This type of life insurance offers lifetime coverage as long as premiums are paid. Permanent life insurance has a unique feature known as cash value.

Traditional Whole Life

Traditional life insurance is the most popular type of permanent life insurance. It covers the policyholder until their death. The payment premiums and death benefits are fixed throughout the policy. It has a guaranteed cash value with minimum interest.

Universal Life

This policy offers more flexibility as death benefits can be increased upon passing the medical examination. Monthly premiums can also be reduced after adequate accumulation of cash value. 

Variable Life

It is a type of permanent life insurance that has investment features. A variable life insurance policy has a cash value account that is invested in numerous investment funds and instruments. Policyholders can choose to invest it from the following sub-accounts.

  • Bonds
  • Stocks
  • Bond Funds
  • Money Market Funds 
  • Equity Funds

As variable life insurance comes with investment features, it also comes with additional risks. Policy amount payouts depend on the performance of investments in sub-accounts.  

Indexed Universal

This policy has a death benefit and cash value. The cash value accumulates interest rate based on the stock market index preferred by the insurance provider. Cash value funds interest rate earnings are not fixed but guaranteed.

Guaranteed Issue

This type of policy does not require health qualifications. This is specifically designed for people with medical conditions who want to avail life insurance. This policy has a waiting period of two to three years. The beneficiary will not receive the death benefit if the policyholder passes away during the waiting period. The insurer will only refund the premium payments plus 10% interest.

How Life Insurance Works

Life insurance works depending on the type of life insurance coverage you will get. Life insurance has two basic elements: death or face value benefit and premiums. Some plans have additional cash value elements like permanent life insurance coverage.

Elements of Life Insurance Policy

  • Death or Face Value Benefit

This is the guaranteed amount of money the designated beneficiary will receive in the event of the death of the policyholder. 

  • Insurance Premium

This is the amount of money the policyholder pays for their insurance coverage. Premiums are based on the policyholder’s life expectancy. An insured’s life expectancy is estimated based on varying factors such as:

  • Age
  • Gender
  • Medical History
  • Occupational Hazards
  • High-risk Hobbies
  • Cash Value

Cash value is a component of permanent life insurance where a portion of the insured’s premium goes to savings. These savings earn interest and accumulate over time. It is a valuable benefit as it could be used while the insured is living. The cash value can be used for loans and payment of insurance premiums.

  • Life Insurance Riders

To accommodate the financial goals and needs of clients, numerous insurance providers offer additional options to life insurance policies. Insurance companies use riders to customize insurance coverage. Riders help in meeting the client’s needs and preferences. Some riders are included in the base premium, while others charge additional premiums. 

Most Common Life Insurance Riders 

Waiver of Premium Rider

In the event of permanent disability of the policyholder, the succeeding premium payments are waived. It is important to fully understand the context of total disability as it may vary from one insurance provider to another.

Accidental Death Benefit Rider

This rider provides an additional amount of death benefit if the insured died from an accident. The additional amount is often equivalent to the death benefit value. It is also called the double indemnity rider.

Accelerated Death Benefit Rider

If the insured suffers from a terminal illness, the accelerated death benefit rider will allow the advance usage of the insured’s death benefit. The insurer typically allows the advancement of a portion of the death benefit from the insured’s base policy. The beneficiary will receive the remaining portion of the death benefit upon the insured’s death. It is critical to discuss the definition of terminal illness with your insurance advisor as the definition may vary between insurance providers.

Guaranteed Insurability Rider

This rider allows policyholders to purchase supplementary insurance coverage without additional medical examination within the stated period. It is particularly beneficial for younger clients as they are more prone to significant changes like marriage, childbirth, and promotions.

Disability Income Rider

This rider will provide monthly income payments in the event of temporary disability caused by serious illness or injury. 

Long-term Care Rider

It is extremely helpful for older policyholders. This rider provides monthly payments for policyholders who are placed in a nursing home.

Family Income Benefit Rider

An insured can avail a family benefit rider. This rider will provide a stable and regular income to the deceased’s family. The insured can decide how many years the beneficiary will receive the benefits.

How Much Life Insurance Coverage is Needed

After deciding which type of life insurance suits you best, the next important thing to decide is how much life insurance coverage you need. Determining the appropriate insurance coverage you need depends on some significant factors in your life. It includes the following:

  • Financial Capability
  • Beneficiaries Standard Cost of Living
  • Cost of Children’s Education
  • Mortgage Fees
  • Investment Needs

To roughly estimate the insurance coverage you need, follow these three easy steps:

  1. Sum up all the household and living expenses of your family.
  2. Forecast future obligations such as children’s education and outstanding loans.
  3. Deduct available resources to support living expenses such as existing life insurance policy and savings (excluding retirement account). 

Cost of Life Insurance

Numerous factors affect the rate of life insurance premiums. Insurance companies consider these factors when computing the policyholder’s premium rates.

Factors that Influence the Rate of Life Insurance:

Type of Life Insurance

Life insurance has two basic types, each type comes in different variations. Term life insurance coverage is more affordable than permanent life insurance.

Age 

The younger the person, the lower the cost of insurance coverage. The risks of death are significantly lower in younger people.

Gender

According to the National Center for Health Statistics studies in 2019, females’ life expectancy is 5.1 years higher than males. Males typically pay a higher premium rate than females except in the state of Montana.

Health Status

A person’s health status is one of the primary determining factors of insurance premium rates. Insurance providers evaluate the previous and current medical condition to estimate a person’s life expectancy.

Lifestyle

Insurance companies also look into the applicant’s lifestyle to gauge their life expectancy. Insurers evaluate applicants for high-risk activities such as occupational hazards, hobbies, driving, and criminal record.

The Best Way To Love Your Family

It is natural for humans to love and protect the ones they love. Protecting those you love includes securing they are in a good financial situation when you leave them. In these uncertain times, life insurance is a necessity. Losing a loved one is already hard, don’t give them an additional financial burden to bear. Protect and secure your family’s future. Get life insurance now. 

Advantage Insurance Solutions aim to help people to achieve their financial goals and needs. We partner with the best life insurance providers in Colorado. We work with reputable insurers like AIG, Zurich, and Nationwide to provide our clients with the best life insurance coverage. Contact us today and let’s discuss how we can protect and support your family.