Group Versus Individual Insurance
Insurance policies are issued to individuals, but also to corporations, trusts, partnerships and other legal entities. There are some noteworthy differences between group and individual policies that may be significant to our readers. While several types of organizations could purchase a group insurance policy, we’ll restrict our discussion to employer-based group policies.
There are group life insurance programs in addition to health, disability and long-term care policies. All types have some commonalities that can benefit both the employer that sponsors the program and its employees who can participate. These policies insure a group of people under a single contract which is purchased and owned by the employer. Generally, the insurer issues a Master Policy to the employer and participants receive a Certificate of Insurance.
Employers benefit from such programs as they enhance employee recruiting and retention. The insurer incurs reduced costs for policy marketing and administration since dealing with one entity is far more efficient than developing multiple individual relationships with each and every employee/participant. The insurer also “spreads its risks” over multiple individuals which allows it to price the coverage more competitively than if it had to absorb the risks of many individual policies.
Some group policies require employees to completely pay or share in the cost of premiums. In other cases, the employer may absorb all premium costs as an employee benefit. The IRS code does not require taxpayers to report employer contributions made on their behalf for health or disability group policies as income. It also allows employer paid premiums for up to $50,000 of life insurance coverage to be received tax free. Any employer provided life insurance coverage exceeding this amount is treated as “imputed income” and must be reported on the employee’s federal income tax return. Employees in this situation are often confused at tax time when they receive a 1099 from their employer reporting the value of this imputed income.
The group sponsor controls the selection of many of the policy options, but the employee does have the right to name or change life insurance beneficiaries. With such reduced flexibility when compared to an individual policy, why would someone choose to participate in a group policy?? Cost is certainly an attraction, especially with group health and disability policies, as the “pooling of risks” facilitates more competitive pricing. For those with chronic health conditions, group policies can be very beneficial as “evidence of insurability” is not required to join the group during the plan’s open enrollment period. For new enrollees, there may be a probationary period to protect the insurer from pre-existing conditions (adverse selection). However, for some people, the ability to obtain coverage without evidence of insurability far outweighs the loss of flexibility and portability of a group plan. And, even if the employment relationship ends, conversion provisions may allow the coverage to be continued as an individually owned policy.
If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.