Comparing Group and Individual Term Life Insurance
Choosing the right life insurance policy can be confusing. To help you navigate your choices, Oliver Financial Planning, LLC (OFP) teamed up with Low Load Insurance Services, Inc. (LLIS) to help University of Michigan (U-M) employees compare their optional group term life insurance and individual term life insurance. If you do not work for U-M, you can apply the comparison to the life insurance options available through your employer.
Before we dig into the group versus individual policy comparison, I want to note that we are not considering whole life insurance in this analysis. If you are like the majority of people, term life insurance is all you need.
So, are you better off electing optional term life insurance through your employer or shopping for an individual policy? Let’s take a look.
Our friends at LLIS reviewed the current cost of optional life insurance available to U-M employees and compared it to the current cost of an individual policy. The chart below summarizes LLIS’ findings. (Click on the image to enlarge it.)
The chart compares the annual cost of a $250,000 individual term life insurance policy (second column) with the annual cost of the same amount of optional group term insurance available to U-M employees (third column). The term period of the individual polices are designed to cover the insured person through age 65 (or 70 in the case of a 60 year-old).
The cost of the individual insurance is broken down by gender and shows a range to account for two separate levels of medical underwriting (based on health history.) Group rates are not gender-specific but increase every five years based on the employee’s age (“quinquennial” pricing).
A glance at the chart shows that the group insurance is less expensive than individual insurance for young employees. Not until age 50 for women and age 55 for men does the individual policy becomes less expensive on an annual basis. The trick, however, is that we rarely hold life insurance for one year. A better comparison would look at the cost of holding each type of insurance over a longer period because individual policies lock in a specific annual cost for the entire term period, whereas group policies typically increase in cost every five years.
Consider the following examples:
- A 45 year-old, preferred-rated male would pay $395 for 20 years (for a 20 year individual policy) for a total of $7,900. Under the U-M group plan, he would pay a total of $10,785 because the premiums would increase every five years. The individual plan would save him $2,885 over the life of the policy.
- A 45 year-old, preferred-rated female would pay $320 for 20 years for a total of $6,400 with an individual policy. Under the U-M group plan, the same female would pay a total of $10,785 over 20 years, which is $4,385 more than the individual policy.
The moral to this story is that it often makes financial sense to take out an individual policy rather than going with your group option by default. Other reasons that favor individual life insurance include:
- It stays with you regardless of your employment status (although U-M’s plan does offer a Conversion Privilege);
- You could save even more versus group rates if you are in exceptional health and get rated as “Preferred Plus”;
- You can “ladder” multiple policies over different time periods (e.g. one $250,000 policy for 10 years and another $250,000 policy for 20 years) to lower your cost; and
- Individual polices often offer additional benefits including conversion to whole life insurance and early payout for a terminal illness.
In contrast, who might benefit from the group insurance?
- Those in poor health or with problematic health histories. The cost of individual insurance increases with the perceived risk to the insurance company. You can get up to $500,000 of group life insurance through U-M’s plan if you enroll within 30 days of eligibility without going through medical underwriting.
- Young employees who only want the insurance for a short period;
- Individuals who want coverage for less than 10 years; and
In summary, the most important step for you to take is to get life insurance if anyone relies on your income. Whether group or individual term life insurance is best for you depends on your specific circumstances. Keep in mind that you can take a hybrid approach and use both group and individual coverage to meet your needs.
If you would like help determining how much life insurance you need and which type is right for you, feel free to contact Oliver Financial Planning or Low Load Insurance Services.
 Group cost for 45 male/female, 20 years = (228×5) + (375×5) + (585×5) + (969×5) = 10,785