Group life insurance a type of term life insurance that is purchased by an employer or organization for the purpose of covering a group of people. Group life is often offered as a benefit of employment or membership for little to no cost. Additionally, it is often possible to purchase supplemental coverage at the same group rates.
Group life insurance is typically guaranteed issue which means if you are a member of the group, you get coverage regardless of your health. However, due to this, group life insurance is priced based on the average health of the group. Therefore, if you are in above average health you can often get cheaper coverage in an individual policy.
So what is group life insurance and is it right for you?
Key Takeaways:
- Group life insurance is a guaranteed term life insurance plan purchased by an employer or organization to offer coverage to all members of the group.
- This insurance is typically offered as an employment benefit or perk of membership at little to no cost to you.
- Group life insurance is rarely enough coverage in itself.
- Typically you can purchase separate supplemental insurance at the same group rates.
- However, since the product is priced for the average health of the entire group, if you are in above average health it is often cheaper to get your own individual policy.
What Is Group Life Insurance?
Group life insurance is an employer-provided or member-provided life insurance. The group life insurance contract is a single contract made between the company and the insurer that covers an entire group of people.
Employers often offer free or low-cost group life insurance as part of their benefit package. Typically the coverage amount is around your annual salary. Membership groups will generally offer low-cost group life insurance to their members.
Group policies are generally guaranteed issue, meaning that all members of the group qualify regardless of their current health status. Additionally, the price you pay is the same rate as everyone else in the group.
How does group life insurance coverage work?
Group life insurance functions essentially the same as an individual term life insurance policy with the following differences:
- The base coverage is usually a flat amount (like $50,000) or a multiple of your annual salary (usually 1-2x)
- The policies are tied to your employment / membership in the group. This means if you leave or get fired you generally lose your coverage.
- Some group policies have a rider to convert to an individually owned policy after your ties to the employer/group end. However, these converted policies tend to be more expensive than most people could qualify for on their own.
- The employer/group own the actual policy but the insurer pays the death benefit to your named beneficiary if you die.
Otherwise the mechanics of a group life insurance policy are the same. A monthly or annual premium is paid to keep the policy active and the employer/group may pay some or all of this costs.
Group life insurance is typically annual renewable term which means the coverage is only for a single year and gets renewed every year. The insurer has the ability to raise prices depending on the experience on the block of business.
What is the cost of group life insurance?
Group life insurance costs depends on the insurer, the employer/group, the coverage amounts, and the underlying experience of the group. However, your employer/group will pay some or all of the costs so you may not see any direct pricing impact on your coverage.
Do you have to pay taxes on group life insurance?
If your group coverage is less than $50,000 there is no tax consequence. However, if the coverage is above that amount, the IRS considers premiums paid by your employer/group to be imputed income. Imputed income is a benefit to you that is not part of your salary but is taxable.
If you are paying for your group life insurance taxes, you will be able to see it on your paystub. It is typically labeled as “group term life” or “GTL”. If you see this it means the premiums your employer is paying to your coverage is taxable.
Group Life Insurance Vs. Individual Life Insurance
Life insurance can be confusing, but it doesn’t have to be if you understand the basics of life insurance. Group life insurance is very similar to individual life insurance in how it operates. A periodic premium is paid and if you die while your coverage is inforce your beneficiary will receive your death benefit amount.
There are a few major differences. For one, you generally have a coverage cap on your group policy whereas an individual policy you can elect a much larger coverage amount.
Additionally, everyone in the group likely qualifies for group coverage and you generally don’t need to go through the underwriting process. If you have pre-existing health issues you may get declined during the individual life insurance underwriting process. And if you go through full underwriting for your individual life policy you need to undergo a medical exam and likely give fluids. However, more and more insurers are turning towards accelerated underwriting which only asks a health questionnaire.
There are other differences between group life insurance and individual life insurance to be aware of as well.
Is Your Group Life Insurance Coverage Enough?
Unfortunately, it is unlikely that your group life coverage through your employer is enough coverage. There are many rules around how much life insurance coverage you need, but the most simple is 10x your annual salary. Since most group policies are capped at 1-2x your salary, you are well short of the recommended amount.
Additionally, your life insurance coverage needs change throughout your life which means you need to continually check for any deficit in your coverage.
However, if your employer offers free group coverage it can be a great start to filling your insurance needs. There are many reasons why you want life insurance and life insurance is not a waste of money so make sure you have ample coverage.
Should You Purchase Supplemental Group Life Coverage Through Your Employer?
For the majority of people, buying additional group life insurance through their employer is not the best use of your money. For starters, your group life rates are based on the average health of those in your office. If you consider that the coverage only makes sense for those who are below average health, this means the pricing on the policies are based on below average health.
Second, your group coverage renews annually and the price increases each year. This is compared to individual life insurance where you generally pay a flat premium for the policy. Therefore, even if the group coverage is cheaper this year, as the price increases it will eventually be significantly more than what you would likely pay on an individual policy.
Third, your group life insurance doesn’t have a cash value account
Fourth, it matures when you retire meaning you can’t count on it for estate planning.
Lastly, it isn’t portable, meaning you lose it if you leave your employer. Some group life policies allow for you to elect to convert it to an individual life policy when you leave, but the price on the converted policy tends to be higher than you could get on your own.
If you need additional coverage, buying affordable term life insurance and investing the difference (BTID) is generally an option. And you can create a term life insurance ladder to manage your coverage needs over time.
The Final Word
Group life insurance is a very common benefit offered by employers and organizations. It provides affordable coverage to you and is free up to a certain amount.
Your basic coverage under a group policy may be less than you need and you may need to tak additional life insurance coverage. It is also tied to your continued employment. You can purchase additional supplemental group coverage but this tends to be expensive unless you are in poor health and likely to be declined if you apply for an individual policy. Most people with pre-existing health conditions have a hard time qualifying for coverage except for final expense insurance so a group policy can be a good way for them to get additional insurance.
Frequently Asked Questions (FAQs):
Group insurance is owned by an organization (typically your employer) to cover many people. It pays a death benefit to your beneficiary similar to an individual policy, but typically the organization pays some or all of the premiums.
A group policy covers many people under one policy while an individual policy covers only one life. Group policies are typically cheaper and easier to qualify for, but often offer less coverage than you need.
Group life insurance that is paid for by an organization rarely offers adequate coverage, you lose the coverage if you leave the organization, and any supplemental coverage or conversion to an individual policy is typically expensive.
The 3 biggest advantages of a group policy are: 1) Your organization will pay some or all of the premiums on the policy, 2) you generally can’t be denied coverage, even if you have a pre-existing medical issue, and 3) it is convenient to sign up for and doesn’t require any invasive medical tests.
When you leave the organization that is providing coverage, you typically have the option to continue the coverage on your own. However this is often for a significantly higher price.
Accidental death and dismemberment insurance pays out to a beneficiary if you are injured or die in a qualifying accident. It typically pays a fixed amount and can supplement your typical coverage. Additionally, some organizations offer AD&D group coverage and even pay the premiums, although AD&D is often recommended as an alternative to life insurance.