What is Group Term Life Insurance?
Group term life insurance is a type of term insurance in which one contract is issued to cover multiple people. The most common group is a company, where the contract is issued to the employer who then offers coverage as a benefit to employees. Many employers provide, at no cost, a base amount of group coverage as well as the ability to purchase supplemental coverage and coverage for employees’ spouses and children. Group term life insurance is relatively inexpensive compared to individual life insurance. As a result, participation is high.
Many employers offer basic group term life insurance at no cost to employees as part of a benefits package.
It is possible, and may be prudent, to have group term life insurance and an individual life insurance policy at the same time.
When you leave a job, you may be able to convert a group term life insurance policy to an individual life insurance policy. However, for many this option is cost-prohibitive.
How Group Term Life Insurance Works
About 85% of companies offer company-paid group life insurance as a benefit, reports the Society for Human Resource Management.1 Group life insurance policies are generally written as term insurance and offered to employees who meet eligibility requirements, such as being a permanent employee or 30 days after hire. Group term life insurance coverage can be adjusted for qualifying life events or during an open-enrollment period.
The standard amount of coverage is usually equivalent to the covered employee’s annual salary. Employers typically pay most or all of the premiums for basic coverage. Additional amounts, ordinarily in multiples of the employee’s annual salary, are usually offered for an extra premium paid by the employee.
If your company offers group term life insurance, you may not be able to “take it with you” if or when you change jobs. Typically, employer-provided group term life insurance is not a portable benefit.
Insured members receive certificates of insurance as proof of coverage. As with individual life insurance, insured parties choose their beneficiaries.
Advantages and Disadvantages of Group Term Life Insurance
Group term coverage is generally inexpensive, especially for younger people, and participants may not be required to go through underwriting as all eligible employees are automatically covered. However, unlike individual term insurance plans, which typically lock in a rate for 20 to 30 years, most group plans have rate bands in which the cost of insurance automatically goes up in increments, for example, at ages 30, 35, 40, etc. The premiums for each rate band are outlined in the plan document.
While inexpensive, in many cases, the amount of coverage offered by group life insurance may not be enough, and should be combined with an individual plan. Employers or association groups offering the insurance often limit the total coverage available to employees or members based on things like tenure, base salary, number of dependents, and employment statuses such as full-time, associate, or executive, with the amount of available coverage varying by group. Most commonly, employers offer multiples of an employee’s salary or fixed amounts, such as $20,000 or $50,000. Many group plans only cover an individual’s base salary. Other forms of compensation may be excluded, such as bonuses, commission, reimbursement, or incentives that are reported as income—for example, an auto reimbursement or restricted stock award.
Another reason group insurance should be considered supplemental is that it’s contingent upon employment. Coverage automatically ends when an individual’s employment terminates, and at that point, it may be harder (or more expensive) to get individual insurance. Some insurers do offer the option to continue the coverage by converting the group term to an individual permanent policy. The conversion options vary, may not be automatic, and could require underwriting. Consequently, an individual could be rated and offered a policy with a much higher premium. Also, the policies available when converting may be limited and are not always the most competitive products.
Consider your employer-sponsored group life insurance to be one piece of your insurance plan. To determine your total needs, and understand how group insurance can play a part, it makes sense to determine:
How much life insurance, if any, do you need?
What kind of coverage (term or permanent) makes the most sense?
How long will you need the coverage to stay in force?
Requirements for Group Term Life Insurance
Typically, all employees are automatically enrolled in the base coverage once they meet the eligibility requirements. Requirements vary and can include working a certain number of hours per week or a certain amount of time as an employee. The availability of supplemental group term coverage differs. In some plans, enrollment is only available when an individual is initially employed or upon a qualifying life event, such as the birth of a child. In other plans, supplemental group term coverage can be added during open enrollment periods. Supplemental coverage may require underwriting. Usually, it is a simplified underwriting process whereby the insurance seeker answers some questions to determine eligibility rather than having to go through a physical exam. The carrier then decides whether or not it will offer the additional coverage.
Employers are allowed to provide employees with $50,000 of tax-free group term life insurance coverage as a benefit. Any amount of coverage above $50,000 that is paid for by an employer must be recognized as a taxable benefit and included on the employee’s W-2.2
If an employer does differentiate, which is allowed, by offering different amounts of coverage to select groups of employees, the first $50,000 of coverage may become a taxable benefit to certain employees such as corporate officers, highly compensated individuals, or owners with a 5% or greater stake in the business.
It is also important to revisit the coverage you have selected during open enrollment to make sure the plan still fits your needs.