What’s the Difference Between Group Life and Individual Life Insurance?

My company is introducing Group Life Insurance for employees. I’ve already got my own personal Life Insurance, which I took out years ago to cover my mortgage. What’s the difference? Should I cancel my current cover and sign up for my company’s Life Insurance scheme?

Question asked by Ms K Prajapati

In some ways, there’s not much difference between Group Life Insurance and individual Life Insurance apart from the obvious one — your employer pays the premiums rather than you!

Your loved ones will still receive a payout on your death from Group Life Insurance — also known as Death In Service Insurance — just as they would from an individual policy.

Tax on Life Insurance

Although your company pays your premiums, usually Group Life Insurance is not a taxable benefit in kind (P11D Benefit). This means there won’t be any additional income tax you’ll have to pay as a result of being covered by your employer.

With an individual policy, you’re paying for your Life Insurance from post-tax income (i.e. after tax and National Insurance have already been deducted). Plus, you pay for cover out of your own pocket rather than having it paid for by your employer.

Life Insurance and trusts

What’s more, your company will write Group Life cover into trust from the outset. Therefore, in the event of a claim, the insurer pays the money to your beneficiaries via the trust, sidestepping any inheritance tax issues on the payout.

While it’s perfectly possible to write individual Life Insurance into trust, many people either choose not to or forget. Your personal Life Insurance payout could therefore be subject to inheritance tax on your death.

How Much Can I Insure Myself for With Life Insurance?

With an individual policy, you have control over the size of your Life Insurance payout.

Although very large benefits might trigger a medical screening by your insurer, as long as you pass this screening there’s theoretically no limit to the amount of Life Insurance you can buy providing you can afford the premiums. (Note that some insurers may ask for financial justification as to why you’re purchasing a very high amount of cover and turn you down if you can’t provide sound reasoning.)

Individual Life Insurance also allows for you to adjust the benefit to suit your needs. You can choose a Decreasing Life Insurance policy, where the benefit falls over time (usually in line with your mortgage) or Level Life Insurance, where the benefit remains fixed.

How Much Company Life Insurance Can I Get?

With Group Life Insurance, you don’t have control over the amount you’re insured for.

Group Life Insurance payouts are usually set at a group level and will be based upon a multiple of your salary. Most companies choose a multiple of between 3 and 4 times your salary. Sometimes policies will have differing multiples of salary for different members of staff based on seniority.

Other Differences Between Group Life Insurance and Personal Cover

Another big difference is that as an individual, you don’t have much control over a group policy. It’s entirely dependent on your company.

That means if you move to another job, retire, are made redundant or otherwise leave the business, your cover ceases. While your next employer might have a scheme you could join, there’s no guarantee this is the case.

You also can’t control how much your business insures you for. A multiple of three times your salary might not be enough to take care of your mortgage and ensure your family’s financial security, for example.

With a personal policy, you can run the cover for as long as you need. You can also ensure you have exactly the amount of cover required.

For this reason, it may therefore be unwise to cancel your personal policy and rely solely on the company one depending on your circumstances.

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