A group-term insurance policy is a pure protection policy issued for a homogenous group of individuals. A homogenous group means that the individuals belong to one group. This includes a group insurance policy for employees as well as other groups like clubs or associations and their members, trade unions, banks and their account holders, etc.
The group term insurance policy offers individual coverage to each insured member. The premium is also determined based on the coverage offered. It can be paid by the group’s head, the members individually or partially by the group’s head and partially by the members.
Despite the differing modes of premium payment, the insurance company collects the aggregate premium from the group. The premium of a group term insurance policy depends on multiple factors. These factors are as follows –
- The size of the group – i.e., the number of members covered. The higher the number of members, the higher will be the premium.
- The risk of the group – i.e., what is the occupation of the group? For instance, in the case of trade unions, the group exhibits a high risk as the members are manual workers. However, in the case of employer-employee groups, the risk is lower since the members are qualified employees.
- The average age of the insured members – the higher the age, the higher the premium will be and vice-versa.
- The sum assured – the higher the sum assured, the higher the premium will be and vice-versa.
- Optional riders chosen – if the group opts for additional riders, the premium increases.
While these factors determine the premium of a group term life insurance plan, the collective premium is lower than the premium for individual term plans for each member. In other words, compared to the aggregate premium payable for individual term cover for each member, the premium for the group term policy is lower. Let’s understand why.
Components of insurance premiums:
The premium of an insurance policy consists of three different costs. These costs are as follows –
- The premium for the mortality risk – this means the premium payable for the insurance coverage provided
- The premium for the savings element of the plan – this is applicable if the life insurance policy offers a maturity benefit.
- The cost of issuing the policy and other administrative costs incurred by the insurance company.
Components of insurance premiums vis-à-vis group term insurance premiums:
If you check for these components in a group plan, here’s how they fare –
- Mortality risk
Since the coverage risk is spread over a group of individuals who belong to a homogenous or the same type of group, the mortality risk is lower. This means that the premiums are lower too.
- Savings element
A group term insurance plan does not have a saving element. The plan pays a benefit only if the insured member dies during the policy tenure. If the member survives the tenure, no benefit is payable. Since the savings element is absent, one component of the premium is removed, which lowers the premium.
- Administrative costs
The administrative costs incurred in multiple policies for each member of the group are high. However, since a group policy involves only one Master Policy, the administrative costs are drastically cut down. This lowers the premium further.
Example of group insurance premiums
If an employer wants to buy a term cover for its 50 employees, buying independent plans for each employee will prove costly compared to a group insurance policy for employees. So, the employer can invest in a group policy and save on the premium costs.
The bottom line
So these reasons reduce the premium of a group term life insurance policy compared to an individual term policy and make it cost-effective. You can use a term insurance calculator to compare the premiums of group plans vis-à-vis individual term plans.
So, for members belonging to a group, a group term plan can be a cost-effective option for enjoying term insurance coverage rather than individual term plans. However, if members want customised coverage based on their needs, they can supplement the group coverage with independent term insurance plans and enjoy a wider scope of protection.
