Functions and many benefits of group life insurance

Arvind, 40, was a married man with two children. He succumbed to a sudden heart attack, leaving his family without much financial support. Somehow, he had been postponing purchase of life insurance, in spite of persuasive efforts of his friend, incidentally a life insurance agent. Luckily, the company Arvind worked for has a group insurance for all its employees. Thanks to it, Arvind’s family received some additional financial security after his death.

The above episode clearly illustrates the significance of group life insurance.

What is group insurance?

As the name suggests, group insurance is a product designed to provide life insurance to a group of people under a single master policy. A group insurance policy can be taken by any group of people, big or small, that comes together for any reason, apart from that of specifically benefitting from an insurance scheme. A group policy extends to anyone irrespective of their age, gender, profession, social background and such factors. Group insurance is not limited to only employer-employee groups, but is extended to other homogenous groups too. For instance, in 2008, a school in Gujarat bought a life insurance policy for its students. (See picture alongside.)

Functions of group life policies
Group life policies are similar to individual life policies and can be classified on the basic functions that they serve. These are explained below:

Gratuity: On completion of five years in an organisation, employees are entitled to gratuity. A group gratuity insurance policy provides a company with an investment option to build a pool of funds that can be used to pay off the gratuity amounts.

Superannuation: A group superannuation scheme serves as a retirement plan wherein the amount that is accumulated over the employment term is released upon retirement.

Term: On death of any of the members of the group, this kind of group plan pays the sum assured (SA) to the family of that particular member.

Savings: A group savings insurance policy can be used as a savings tool for the members to accumulate wealth along with life insurance.

Credit protection: This type of insurance policy is usually offered by banks or lenders. The plan covers any outstanding loan amount that may be due after the death or disability of the loanee.

How much do group insurance plans cost?

The insurers that provide insurance to these groups evaluate the risk based on the group as a whole and decide on the premium to be paid, according to the risk classification of the group. The premium contribution can be usually done in two ways.

Either the entire premium amount is paid by the company/ group owner that has purchased the policy for its employees or members, or, like in a majority of cases, the premium is partially paid for by the insurer, while the rest of the amount is paid by the members of the group. This is a good option for someone who may have to pay a larger premium for life cover due to his risk profile.

Since a group plan covers all kinds of risk profiles under the same policy, they usually charge a lower premium than an individual plan.

Benefits of group life insurance
The various benefits offered by group insurance are as follows:

Default insurance cover: Group insurance plans provide “auto-cover” to the member or employee simply by virtue of being part of that particular group or organisation. This provides at least a basic cover to those without any other insurance cover. It is essential, however, to have an individual insurance plan to ensure you are covered even if you leave the group.

Employer benefit: In many cases, employer gets tax benefits and, in certain cases, members of the group can avail of tax benefits. For instance, Sarva Shakti Suraksha, the micro-insurance product offered by Bajaj Allianz, covers non employer-employee groups.

Ease in premium payment: The payment of the premium is not missed as it is deducted from the employee’s salary, thereby leading to continuity of cover as long as you are part of that group.

Employee welfare: Group life insurance serves as an employee welfare plan, as well as an employee retention plan, since it provides not only for the employee but his/her family.

Experienced fund management: In case of group gratuity and superannuation plans, it is possible that in a certain year, the gratuity to be paid could be high, resulting in unplanned outflow of funds. In order to create a pool efficiently, experienced fund management from insurance companies is beneficial.

One, however, needs to keep in mind that even though there are numerous benefits to group insurance, there are some shortcomings one will have to keep in mind.

Benefits of all group life insurance plans such as life cover, savings plan, superannuation, will be terminated if you leave the group. The benefits are good only while you remain a part of the group.

If you develop any health conditions after the policy is issued, since the group policy is underwritten, it may become more expensive for you to buy an individual life insurance policy. Since features and options for life insurance are limited, an insurer may not give you full coverage based on pre-existing health conditions at the time of applying for individual policy.

Group term life insurance is purely an employee benefit, as the sum assured is usually limited. The coverage may not be enough to fully support your family upon retirement, sudden illness, or even death.

In a nutshell
Group insurance is a beneficial, cost-effective and hassle-free insurance solution that provides at least a minimum cover to the members as a benefit of being part of that particular group. It is, however, important to consider a group insurance plan only as a supplementary plan and opt for a separate individual plan too, since the benefits of the group plan terminate if you exit the group.

The writer is chief distribution officer at Bajaj Allianz Life Insurance