On a general note, I’m not entirely sure what the original question is asking about when it comes to “individual vs. observation”, but more generally, the annotations should be for whatever the target individual organism is in the observation. Each observation is intended to be for a specific focal organism (sometimes the observer indicates one, sometimes not) (see definition of observation). This is why there’s no option to annotate “Both” for “Alive or Dead” (the focal organism can’t be in both states simultaneously) - even if the observation were to show multiple individuals that are both dead and alive. Other annotation fields are also structured this way.
This type of scenario is the topic of this current thread:
https://forum.inaturalist.org/t/multiple-life-stages-in-one-photo-multiple-sexes/82546