Advantages of Group vs. Individual Insurance Plans

Individual Health Insurance: What it Is and How it Works

As the name suggests, individual health insurance is health insurance coverage purchased by the policyholder, either directly from the insurance provider or via a third-party broker acting as an agent.  The contract is between the policyholder and the insurer and relates to the insured individual and, in some cases, their immediate family. An important feature of individual health insurance plans is that only two main parties are involved in the contractual relationship: the insurer and the insured. 

With individual health insurance plans, premiums are typically paid monthly by the policyholder. If someone on the policy needs medical assistance, the policyholder will file a claim with the insurer to reimburse some or all of the costs incurred. 

Group Health Insurance: What It Is and How it Works

Group health insurance is less straightforward and has more parties involved than just the insurer and the insured. It is an insurance arrangement where an employer arranges the health insurance contract and typically pays some of the cost of the monthly premiums, which can be as much as 85-90% but is usually much lower.  Often, the employer will contract a third-party organization, like a PEO, to arrange the health coverage plan to ensure that it meets the needs of their employees.

The insured parties are the employees, and in some cases, their immediate family members, but the insurance gets arranged by the employer or their PEO. Typically, multiple employees will be covered using a health insurance plan that their employer enrolls them in. 

The Costs Involved in Group Plans Versus Individual Plans 

It is challenging to make a straightforward financial comparison between taking out health insurance as an individual as opposed to enrolling in an employer’s group plan. Insurance, by definition, relates to unknowable future outcomes; you are making a decision based on chance and likelihood.  That is to say, “cheap” insurance can be a false economy, as when you purchase insurance, you are ultimately hoping that the value is never realized,  i.e., that you don’t need it to pay.  As a result, gauging cost and value are quite complicated.

For example, paying more than is reasonable in your premiums for the benefit of no deductible is neither financially pragmatic nor poor value: this all depends on whether or not you end up making a claim. Furthermore, if a policyholder makes a claim, the cost of the premiums paid often becomes insignificant compared to treatment costs. 

That said, certain pricing differences ought to be understood for policyholders and employers to decide on which type of policy works best for their needs. 

Universal Coverage 

Group plans are underwritten based on a large pool of employees, with the idea that more individuals will get added as the company grows. As a result, underwriting decisions are not made based on employees’ health, meaning individuals who would otherwise struggle to find health coverage via an individual plan can still qualify. The guarantee that employees can access health insurance is a significant offering for companies to provide to employees. 

Risk Pools and Price per Head

When an insurer agrees to provide insurance, they underwrite the risks involved and price the premiums accordingly. In the case of an individual policy, it is the policyholder and their family whose risks get assessed. However, with group plans, the group’s overall risk is assessed rather than the individual.

With a group plan, the insurer will look at the “risk pool” of the entire group and underwrite based on the combined premiums and combined chances of a claim getting made. Mathematically, this works out as more favorable and helps save on costs. These savings are divided between all insured employees, resulting in a lower “price per head.”

In addition, group plans benefit from additional factors like taxable employer contributions and economies of scale, so they typically end up being substantially cheaper than individual plans. For a comprehensive breakdown of how the costs work, continue reading below.

Payroll Deductions 

Because individual plans are a contract between the insured individual and their insurance provider, the responsibility to meet the cost of the contract falls on the individual. Therefore, the policyholder’s premiums get met monthly like any other monthly cost, and there are no tax savings or benefits. 

On the other hand, group insurance plans are a little bit more complicated. The monthly premiums are met by the insured individual and the employer, who are jointly responsible, although ultimately, only the individual will benefit from the policy. As a result, the employer can write off their contributions to the plan as a business expense, reducing their tax bill. For a larger company with multiple employees enrolled in a group plan, this can be a significant tax write-off, especially if the company is paying a substantial portion of the premium every month. 

Most companies that offer group insurance plans to their employees will pay the premium themselves and then deduct their employees’ contributions from their paychecks each pay period.  This is significant because the employer’s contribution to their group plan will come out of their pay before tax gets taken. 

In other words, an employee’s gross pay is used to meet the premium costs before any tax gets paid, which lowers their overall tax liability. 

If you have monthly insurance premiums of $500, for instance, and an income of $50,000 per year, your taxable income will be reduced by $6,000. 

This arrangement is financially beneficial to both the employer and the employee, reducing the tax liability for both parties. However, neither of these savings apply when insurance is provided on an individual basis.

Understanding the implications of paying premiums from your pre-taxed income is essential to appraise the benefits of a group health plan rather than an individual plan.

Download: Advantages of Group vs Individual Insurance Plans

Economies of Scale

Typically, a collection of people doing the same thing as individuals is more costly than one organization administering the entire process. This is because of what is known as ‘economies of scale.’ For example, in the insurance world, the savings to be had by collectively insuring a large group of people stacks up quickly, so group insurance ends up being significantly less expensive than the cost of policies arranged by individuals.

In addition, PEOs can typically “buy in bulk” or negotiate from a stronger bargaining position with an insurance provider, seeing as they are buying for a larger group. Typically smaller companies are barred from accessing the lower-cost insurance plans which larger companies can qualify for, but a bonus of using a PEO is that all of the clients of a PEO get banded together when it comes to purchasing insurance plans.

That is to say; even if you have a smaller company with only a handful of employees, by using a PEO to arrange your health plan, you’ll be able to access the same highly professional, well-respected, expertly underwritten insurance policies as large corporate entities.

Should further expertise be required as changes occur within the insurance market, the legislative system, or the world of healthcare, instead of numerous individuals locating and consulting experts, this is something the PEO can manage on a group basis, saving costs and maximizing efficiency.

An additional scale-related benefit of purchasing group health insurance through a PEO is accessing ancillary PEO-provided services and functions. As PEOs also offer support with functions like compliance, various human resources consulting, 401k administration, and payroll work, health coverage can be bundled into the package of outsourced support, which companies no longer need to arrange in-house. Thus, there is a significant opportunity cost saving in not having to concern oneself with insurance.

Flexibility of Plan

Another comparison worth considering between group and individual plans is flexibility.

As a group plan is arranged for a company’s employees, there is a degree of flexibility built-in. For instance, the company may be experiencing rapid growth and have an expanding pool of employees in need of insurance.

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