Group Insurance

Updated on January 5, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Group Insurance?

Group insurance covers a group of people related to each other by some defined criteria, i.e., members of society or any professional association, employees of an entity, employees working under the same employer, etc. It can be life insurance, health insurance, or any other type of personal insurance.

Group insurance plans are meant for formal as well as informal groups. A formal group is normally the one in which the members are related to each other under same contract or conditions, like employees or professionals working under same employer. On the contrary, informal group can be any association where members informally operate together.

Group Insurance Explained

Group insurance is for a person created by pooling the people who are related to the same profession or same association or any other defined criteria. Many insurance companies have introduced such a scheme to provide the requirements of many specific groups like professionals in an organization, employer-employees, etc.

The group insurance policy is a single policy taken for a group of people who are related to each other as the defined criteria in the terms and conditions of the cover. The group policy results in the reduced cost for the group head and the individual beneficiary with wider coverage of terms and conditions related to the cover. All the beneficiaries are judged uniformly without any discrimination.

The head or group administrator enters the group insurance contract. The group administrator entered into a single contract with the insurance company, which will cover the insurance of all the group members. In addition, all the members would issue a certificate for proof of insurance. These contracts are only valid for the individual until he remains in the group; if he leaves the group, one will also discontinue the contract. The payment of premium for the insurance would be paid by the administrator, for which he will charge the respective amounts from the other members.

In case of any incident or query related to the insurance needs to be communicated, the respective beneficiary can directly contact the insurance company without looping the group administrator into the conversation.

Objectives

A group insurance policy serves a number of purposes. Some of them have been listed below:

Objectives of Group Insurance

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#1 – Provides Investment Plans to Pay off Gratuity to the Employees

In the case of an organization, employees completing more than five years of service are eligible for the payment of gratuity. In this kind of scenario, the organization has the option within the group insurance plan to invest or create a corpus that one may use further to pay off the gratuity amount to the eligible employees.

#2 – Covers Term Insurances

In terms of insurance, the sum assured is paid off to the deceased’s family members in case of the person’s untimely death.

#3 – Increases the Habit of Long Term Savings

It increases the habit of long-term savings for the members covered in this insurance, and these insurance or savings helps to cover the further future liability of the person, like marriage or education fees for the kids.

#4 – Offers Annuity Facility

It provides superannuation schemes for employees for their retirement plans. In the scheme, the employees accumulate the premium throughout their service and get paid as a pension after retirement.

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Characteristics

Group insurance is so named as the same policy applies to a group of people connected with each other under the same umbrella of a particular types. They may be employers and employees or cooperative societies, etc.

  • For such a policy, a group of individuals should be related to each other by some defined means.
  • In the case of this insurance, the effective cost comes less than if one would have taken the individual insurance. So in consideration of an organization, it is more effective as less paperwork, less controlling documents, less controlling personnel involvement, and effectively less cost to the organization.
  • In the case of this insurance, there is no risk based on classification or discrimination between the group members. There is no discrimination regarding gender or age etc. All persons charge the same premium amount that belongs to the same group insurance policy. Thus the plans are uniform and provide the same benefits to all the members.

Types

There are different types that insurance companies offer to the related entity as per the requirement of the entity. For example, these schemes could be as follows:

Group Insurance

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#1 – Health/ Medical Insurance

Health insurance is for various entities like small and medium size enterprises, where an employer can get a group health insurance policy covering all of his employees, and the cost of the policy is quite low for SMEs as well.

#2 – Term Life Cover

This is provided the same as the Group Medical Insurance, and the premium amount for the insurance is deducted from the salary of the employees monthly (in case of the employer-employee group).

#3 – Personal Accident Insurance

Personal accident insurance covers the accidental death of the beneficiary as well as medical expenses along with partial or total disabilities. So, the beneficiary does not have to take other individual insurance covers for injuries or health issues for which he does not need hospitalization. This cover includes the charge and fees of doctors in such scenarios.

There are other group insurances as well like:

  • Group Pension Plans
  • Worker compensation insurance
  • Travel Insurance etc.

Example

Let us consider the following instances to understand the group insurance definition better:

Company A decides to purchase a group insurance plan for its employees, given the dedicated efforts they put, and making sure they take care of their health expenses smoothly when required. Hence, they apply for the scheme and make sure all its employees are covered under the group health insurance.

It connects with the insurance provider and goes through the requirements to know the premium and the amount it needs to put in the scheme from its side. The company knew that these policies will help employees fulfill their financial needs and thereby utilize their employee benefit payouts effectively.

After everything is finalized, the group insurance activates.

Benefits

Group insurance policies are like personal policies that offer coverage to individuals, but it is active for a group as a whole with the same type of coverage for all. These coverage schemes have a lot of advantages for policyholders. Let us have a look at some of them:

  • Mostly these policies provide lower costing to the group administrators and better insurance plans with wider coverage of conditions than individual insurance plans.
  • The group insurance offered by the management provides a better effective environment within the entity by providing the employees a morale boost and a healthy and good working environment.
  • The administrators taking these covers benefit from it as tax benefits also provided in the respective tax laws.
  • Also, these payments are made from the employee’s salary, so employees have a hassle-free way to submit the payments without filling out any other forms or going somewhere to pay the premium.
  • In the case of pension or superannuation schemes, the funds are managed by insurance companies and provide a greater return to the employees compared to the funds managed by the entity.

Limitations

Besides multiple benefits that these policies offer, there are a few disadvantages as well, which the firms or entities or individuals must be aware of before the enroll into it. Some of the limitations of these plans have been mentioned below. Let us have a quick look:

  • The individual beneficiaries do not have any control over their portion of coverage of the policy.
  • It will discontinue the insurance contract if the beneficiary leaves the group, i.e., if an employee leaves the organization, the cover will be discontinued for him.
  • In this type of insurance, all are treated uniformly. It results in the same risks considered for every person, like for a healthy person and a seriously sick person. Therefore, the cover will be considered the same with the same terms and conditions.

Group Insurance vs Individual Insurance

These two terms are mainly used in the context of group health insurance coverage. Though the coverage provided is of the same nature, i.e., personal for the individuals, the names might appear misleading. An individual insurance is obtained on the name of an individual, who is the ultimate beneficiary. On the other hand, group insurance is the policy, which gives all the benefits of individual health insurance, but it is obtained on the name of a group with same set of criteria.

Let us check out the basic differences between these two types of insurance policies:

  • Individual insurance is purchased by an individual, while its group counterpart is purchased by employers or cooperative societies for their employees or members, respectively, as a group.
  • An employer offers multiple choices for the employees to choose from and they are the ones who provide all required information to their employees. On the contrary, in case of an individual insurance, the person purchasing the scheme needs to obtain all information by themselves.
  • In case of group insurance, employees have to pay a specific amount as premium for the coverage, which is deducted from their gross salary. On the other hand, the individual insurance do not lead to any salary deductions.

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This article has been a guide to what is Group Insurance. We explain the concept along with its types, vs individual insurance, benefits, example & characteristics. You may learn more about financing from the following articles: –

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