Beware of Group Insurance

Group insurance is very popular owned by many people.  But there are some key distinctions that make it seem better than it actually is.  Ultimately, it is nice to have but should be looked at nothing more than that – something that is nice to have. It should not be used in place of traditional insurance.  Let’s look at why.

What is Group Insurance?

 

Group insurance is insurance of some form that is offered at favourable conditions to a group of people.  Essentially insurance companies find populations that have a commonality, such as employer, financial product, etc., and offer insurance to them.

Key Distinction

 

With group insurance, you do not have to complete medical history or checks.  This may seem advantageous but this is actually the downfall of group insurance.  Insurance companies have the ability to do back and deny your claim.  For example, if you have group life insurance and you die of cancer, they insurance company can deny the claim.  Regular life insurance does not work that way.  If you are approved for coverage you will 100% receive the benefit.

 

Why This Impacts You

The point of insurance is to protect against the financial risk of an adverse event.  In the case of life insurance, the main purpose would be to ensure that your dependants can financially survive should you die and not be able to provide an income for them.

Should you have group insurance and die, if your claim is denied then there was no point to having this insurance.  Going back to the purpose of insurance, it is to eliminate risk.  If you have not eliminated all of the risk than your insurance is not doing a very good job!

Takeaways

Some instances group insurance will be provided for you.  This is great and a nice value added.  In some manor of looking at it, it is free money.  In theory, you could calculate the expected value of payout and that is value added.  But, it should not be looked at as an alternative for the insurance you would have otherwise purchased. As a rule of thumb, never opt in for group insurance and never take it into account when you determine the amount of insurance you would normally purchase.

Another way to look at it is how often are you offered group insurance?  Banks thrive on this and make boat loads of money off of group insurance.  Think about when you get a new credit card.  Banks always push the insurance for the credit card on you.  Why? Because they make a lot of money on it.  Financially speaking, insurance is a zero sum game.*  The more money they make, the more money they are “overcharging you”.

*If the present value of the premimums equals the present value of the policy payout (changes based on expected year of death) as the baseline, then any increase in premium benefits the insurer (positive expected value) and is disadvantageous to the insured (negative expected value).  The vice versa holds true.