Group Life Insurance vs. Private Life Insurance

Life Insurance is often a foundational component of a holistic financial plan and is typically acquired in one of two ways: group and private policies. Certain individuals will default to relying solely on a group policy provided by their employer while others prefer a privately-owned policy. Few people are given the tools to identify the distinction and potentially integrate both into their financial plan. This article aims to provide those tools by differentiating between group and private policy designs, policy underwriting requirements, and policy details.

Policy Design

As most group policies utilize an Annually Renewable Term (ART) design, this article will exclusively compare group and private ARTs. An ART design functions similarly for both: It offers “temporary coverage” for an open-ended period so long as premiums are paid and the insured is under the policy’s maximum age. Premiums change annually based on the insured’s “year-ending” age, typically resulting in an increase. While premiums guarantee coverage within the parameters of the policy contract and timeline, the policy accumulates no cash value or opportunities for return of premium. The most significant differences between group and private policies, then, reside in the policy underwriting requirements and details.

Policy Underwriting

Underwriting is the process in which an insurance company determines insurability by evaluating one’s risk classification with factors such as demographics, health, and lifestyle risk considerations. As an employer-offered benefit, group policies are considered guaranteed insurance, meaning minimal underwriting is required to approve coverage. To provide this coverage, the policy uses a blended risk classification based on an employee census: This typically yields a unisex, semi-smoker, sub-standard health rating.

Underwriting requirements for a private policy vary depending on the death benefit amount, insurance company, and information provided on an application. A lower death benefit is likely to require less underwriting: A larger policy, on the other hand, may require extensive underwriting, such as a medical questionnaire, full medical exam, and official physician statements.

Underwriting requirements for a private policy allow for individual consideration, providing an opportunity for a more competitive health rating than the blended group rate. Therefore, a relatively healthy applicant can potentially secure a larger policy at a lower cost through a private policy.

Policy Details

The greatest differences between group and private policies are in the details, such as riders and continuation options. Policy riders are additions to the policy that offer certain coverages outside the basic policy contract. Some prominent riders include Waiver of Premium, which covers the price of the premium should the insured be disabled and unable to work, and the Accelerated Death Benefit Rider, which will pay out some or all the death benefit to cover major, life-dependent medical expenses. Employees may have the option to add riders to their group policy, but the opportunity is dependent on which, if any, the employer chooses to offer. In terms of a private policy, the policyowner has the control to modify the policy with riders as long as they are offered by the insurance company.

Continuation options outline the courses of action one can take to keep their insurance. Group policies may allow the employee to keep their coverage after employment has ended with continuation options, but they are often not outlined in the initial contract and are dependent on the employer’s discretion. Private policies, on the other hand, outline the permanent coverage continuation options for the policy owner before the policy is in force. Depending on the company, the policy owner may have a wide array of options at the time of conversion, such as Whole Life, Universal Life, and Variable Universal Life.

Conclusion

The discrepancies outlined in this article focuses the reader into the largest difference between group and private policies: Control. In a group policy, the employee only controls opting into a policy pre-designed by the employer; In a private policy, all aspects of its function are determined by the policyowner. Understanding where the control lies can optimize the use of both into a strong, holistic protection plan.

Author: Andrew Pelletier

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