Group life vs individual life insurance

Life insurance through work is the first coverage many adults ever have, and for a while it is enough. It costs little or nothing, it requires no medical exam, and it arrives automatically in the benefits package. The trouble is that it is tied to something other than the person insured: a particular employer, a particular plan and a particular contract between that employer and a carrier.

An individual policy is the opposite arrangement. The insured person, or someone they choose, owns it. It is underwritten on that person's health and priced for them, and it continues regardless of where they work. Neither is better in the abstract. The useful questions are what each costs over time, what happens to each when life changes, and how much of a household's coverage should sit in each.

How group life works

An employer, union or association holds a master contract with a carrier, and eligible members receive certificates of coverage under it. Basic group life is usually employer-paid and set as a flat amount or a multiple of salary. Supplemental or voluntary group life lets the employee buy more, often in multiples of salary, with payroll deduction, and coverage for a spouse and children can be added in smaller amounts.

Group coverage is underwritten on the group rather than the individual. Up to a certain amount, often called the guaranteed issue amount, employees are accepted without health questions, especially when they enrol at first eligibility. Elections above that amount, or made late, generally require evidence of insurability. Supplemental premiums are typically age-banded, meaning the rate per thousand dollars of coverage steps up every few years as the employee ages. Employer-paid coverage above a threshold set by federal tax rules also creates taxable imputed income for the employee.

How individual life works

An individual policy is applied for, underwritten and issued to one person. The carrier reviews health history, prescriptions, driving record and sometimes an exam, then places the applicant in a rating class. A term policy locks a level premium for the chosen period, commonly ten to thirty years, and a permanent policy locks coverage for life with cash value inside. The face amount is chosen to match the household's need rather than the employee's salary.

Because the owner controls the contract, it survives job changes, layoffs, retirement and moves across state lines. The owner names and changes beneficiaries directly, can add riders such as waiver of premium or accelerated death benefits, and can often convert term coverage to a permanent policy without new medical underwriting during the conversion window.

The mechanism that actually differs

The first difference is pricing. Group rates reflect the pooled health of everyone in the plan, which makes them attractive to people who would rate poorly on their own and less so to healthy people who could qualify for a preferred class individually. Group supplemental rates also climb with age bands, while an individual term premium is set at the age of purchase and stays level for the term. Group life often looks inexpensive at thirty and noticeably less so at fifty.

The second difference is continuity. Group coverage generally ends when employment ends, or when the plan is changed or terminated. Plans commonly offer two exits: portability, which lets the departing employee keep group term coverage by paying the premium directly, often at higher rates and for a limited period, and conversion, which lets them convert to an individual permanent policy without health questions, usually at a significantly higher premium. Both options must be elected within a short window after coverage ends, and both are priced for people who cannot get coverage any other way.

A worked career change

Suppose a thirty-five-year-old nurse in Salt Lake City earns $80,000, receives employer-paid basic life of one times salary and buys supplemental coverage of three times salary for about $12 a month. Say that is $320,000 in total. Now suppose a healthy peer instead buys a twenty-year individual term policy for $500,000 at about $30 a month and takes only the basic group coverage.

Suppose at forty-seven the first nurse is diagnosed with a heart condition and at fifty moves to a clinic with a smaller benefits package. The supplemental rate had risen through several age bands along the way, and on leaving, the nurse can port the coverage at a higher monthly cost or convert it to a permanent policy for, say, several hundred dollars a month. A new individual application would now be rated heavily or declined. The second nurse's premium is still $30 a month, the coverage moves to the new job untouched, and the policy can be converted if permanent coverage is later needed. All of the figures are hypothetical.

Who each suits

A household is usually better served by a layer of each than by relying on one alone. How thick each layer should be depends on health, age and job security.

• Basic group life is worth keeping by anyone who has it; it is usually free and any benefit is additional to what the household holds individually.
• Supplemental group life suits employees with health conditions that would make individual coverage expensive or unavailable, particularly when elected at first eligibility to stay within the no-questions amount.
• Individual term suits healthy people with long obligations such as a mortgage or young children, since the level premium and portability matter most over a long horizon.
• People who expect to change jobs, start a business or retire early should hold the core of their coverage individually, because group coverage tends to end at exactly the moment a household has less income to replace it with.
• A spouse without their own employment benefits needs individual coverage, since spousal group amounts are small and depend on the other spouse's job.

Regional notes

Large employers across the region, including hospital systems, school districts, state and local governments, mining and energy companies and the major military installations in each state, all offer group life with different plan designs, so two households with similar incomes can have very different amounts in force. Service members have their own group program with its own conversion rules on separation. Arizona, Nevada and Idaho are community property states, and Utah is not, which can affect how premiums paid from marital earnings and the resulting proceeds are treated. Employer plans governed by federal benefits law can also follow different beneficiary rules from individual policies, so both kinds of designation deserve a review after a marriage, divorce or death in the family.

When to keep what you have

A household that holds an individual policy sized to its real obligations, priced when its members were younger and healthier, should keep it and treat group coverage as a supplement; replacing an older individual policy with cheaper-looking supplemental group coverage gives up a level premium and portability for a rate that will rise. An employee with a health condition who holds supplemental group coverage may also be correctly placed, since it may be the most affordable coverage available to them, and the task is to know the portability and conversion deadlines before leaving the job. We add up both layers against the household's obligations, quote individual coverage from the carriers we represent in Arizona, Nevada, Utah and Idaho where it is worth comparing, and if what is already in place fits, we say so.