Group life insurance, or basic life insurance, is often provided by an employer or organization to its eligible workers or members. It’s an easy and affordable — or sometimes free — way to get life insurance because no medical exam is required.
However, group life insurance often comes with low coverage. While it may benefit those who simply need coverage for funeral expenses, breadwinners may want to get supplemental life insurance to increase the policy’s coverage while benefiting from group rates.
Employers offer group life insurance to eligible employees to help them protect their loved ones and beneficiaries in the event of their death.
A group life policy is usually more affordable than individual policies due to negotiated rates but may provide a limited level of coverage.
Employers may choose to subsidize the costs of group life insurance entirely or may pay for it in part and deduct the premium from your salary.
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What Is Group Life Insurance?
Group life insurance is a policy offered by employers and private organizations to eligible employees or members to protect their families' financial well-being if the policyholder dies. It is sometimes called basic life insurance or employer-sponsored insurance.
Group life policies are a convenient and affordable way to get coverage because employees don’t need to undergo a medical exam and can benefit from shared premiums. Some companies may even offer group life insurance for free.
How Does Group Life Insurance Work?
Generally, group life insurance covers several people under a single contract in the employer’s name. The employer can pay premiums entirely or partly, with the remaining portion paid for by employees who opt in.
Depending on the employer, the amount of coverage may be based on a specific dollar amount, the equivalent to an insured's annual salary or a multiple thereof. If the coverage amount is small, employees can sometimes purchase supplemental life insurance, adding more coverage at group costs.
Typically, companies choose term life policies because they don’t expect employees to stay at one company their entire lives. However, some companies may offer whole life insurance, which includes a cash value component.
Common Requirements for Group Life Insurance
Some group life insurance policies may require a minimum number of employees to participate in the plan. This number can vary depending on the insurance provider and the specific policy.
Typically, only full-time employees are eligible for group life insurance. Some employers may extend coverage to part-time employees and those with irregular work schedules, but they may need to work a certain number of hours per week to be eligible.
Some organizations may also have a waiting period before new employees are eligible. This period can range from a few months to a year, depending on the employer's policy.
How Group Life Insurance Benefits Are Calculated
Calculating the benefits of group life insurance is done through various methods, each tailored to different needs and preferences.
Fixed multiple-of-earnings benefit plans: The benefit is calculated as a fixed multiple of the employee's earnings, such as two or three times the annual salary. It's a straightforward approach that aligns the benefit with the employee's income level.
Variable multiple-of-earnings benefit plans: A variable multiple is used based on factors like age or years of service. It allows for more customization in determining the benefit amount.
Flat-dollar-amount benefit plans: A flat dollar amount is set for the benefit, regardless of the employee's earnings. It provides a uniform benefit across all employees, ensuring equality in coverage.
Variable-dollar-amount benefit plans: Aspects of the other methods are combined, allowing for a variable benefit based on a combination of factors such as age, earnings and years of service. It offers flexibility in tailoring the benefit to individual circumstances.
What Is Not Covered by Group Life Insurance
Group life insurance provides coverage for many scenarios, but it's not all-encompassing. Understanding what it doesn't cover can help you make informed decisions about your insurance needs.
Death by Suicide within the Exclusion Period: Most policies have a clause excluding coverage if the insured dies by suicide within a specific timeframe, usually 1–2 years from the start of the policy.
Death from Risky Activities: Engaging in high-risk activities like skydiving or extreme sports may not be covered, depending on the insurance policy and provider.
Fraudulent Information: The insurance provider may deny a claim if the insured provided false information during the application process.
Certain Types of Death in Specific Locations: Some policies exclude deaths occurring in certain countries or regions known for conflict or instability.
Advantages and Disadvantages of Group Life Insurance
Group life insurance offers distinct advantages and potential disadvantages. Understanding both can guide you in making the right choice for your situation.
Group life policies are employer-sponsored, meaning the company subsidizes some or all of the premium costs. Since group insurance rates are typically lower than individual rates, many companies can afford to do this.
However, since it’s not mandatory, employees consider employer-sponsored group life insurance a benefit.
Low-cost or free
Group life insurance can be completely or partially subsidized by the employer. But even if it's partially subsidized, group life insurance can be attractive for employees who want low-cost coverage. Even if you upgrade your coverage at an extra cost, it may still be cheaper than purchasing life insurance on your own.
Typically, group life policies offer maximum coverage of one year's base salary, excluding commissions and bonuses. While employees may have the option to upgrade their coverage, this may not be enough for those who are the primary breadwinners or have significant financial obligations.
If a group life policy is insufficient, you can increase your coverage with an individual policy.
Employees can enroll in group life insurance policies without having to undergo a medical exam, making buying coverage easier. This can benefit employees who are smokers or have underlying health problems.
In some organizations, employees may have to wait for a specified time frame before qualifying for group life insurance.
If an employee leaves their job or is terminated, some group life insurance policies offer the option of converting the group coverage to an individual policy. It’s a convenient option for employees who want to ensure their coverage is maintained. However, it is important to note that conversion may come with higher premiums.
The employer applies for and manages a group life insurance contract, meaning they can also make changes as necessary. They can increase premiums or reduce coverage without the employees' consent. While this may be a disadvantage for employees, an employer needs to maintain control over the group life policy to ensure it remains affordable and sustainable.
Group life policies usually offer maximum coverage of one year's base salary, excluding commissions and bonuses. While employees may have the option to upgrade their coverage, this may not be enough for those who are the primary breadwinners or have significant financial obligations. If a group life policy is insufficient, you can increase your coverage with an individual policy.
Typically, group life insurance coverage is tied to an employee's employment and will end if the employee resigns or is terminated.
Group life insurance can be convenient and affordable, but it may not offer enough coverage even after upgrading with supplemental life insurance. If you have significant financial obligations or are a primary breadwinner, it might be wiser to get an individual whole or term life insurance policy to ensure your loved ones are fully protected. Individual policies can be tailored to your needs and not tied to your employer, ensuring you have coverage no matter your employment status.
Types of Group Life Insurance
Group life insurance is available in various types to meet the diverse needs of employees and organizations. The employer selects which kind of policy to offer, considering factors such as the company's budget, the needs of the workforce and the overall benefits package. Employees may then have options within the chosen policy type to tailor coverage to their individual needs.
The types of group life insurance policies are:
Term Life Insurance
Term life insurance provides coverage for a specific period, often one year, that can be renewed. It's typically used for temporary coverage needs and is often offered at low or no cost to the employee. This type of life insurance is ideal for employees seeking short-term protection without a cash value component.
Whole Life Insurance
Whole life insurance is a permanent coverage policy that lasts for the insured's life, including a cash value component. It provides long-term stability and a savings component, making it suitable for those looking for lifelong coverage with an investment aspect.
Universal Life Insurance
Universal life insurance is a permanent coverage policy that has a savings component and offers premium flexibility. People who want to invest their savings into some interest-bearing subaccounts typically use this kind of policy. Universal life insurance is designed for employees seeking investment opportunities and flexibility in premiums and death benefits.
Variable Universal Life Insurance
Variable universal life insurance allows the policyholder to invest some savings into interest-bearing subaccounts, with the value potentially fluctuating with market changes. It combines investment opportunities with life insurance coverage, making it suitable for those interested in investment options within their life insurance policy and willing to take on more risk.
Veterans' Group Life Insurance (VGLI)
Veterans' Group Life Insurance (VGLI) is a group term life insurance tailored for veterans. It provides specific coverage that meets the needs of veterans, making it an ideal choice for veterans seeking term life insurance with features designed for their unique circumstances.
How Much Does Group Life Insurance Cost?
Group life insurance costs can vary widely depending on the employer and the specific policy. Because many employers can purchase policies at wholesale or discounted rates, they offer this insurance free or at a low cost, making it an attractive benefit for employees.
Generally, group life policies are considered more affordable and accessible than individual term life insurance options. The collective bargaining power that comes with covering multiple employees under one policy often results in lower premiums compared with individual policies.
Group life insurance premiums are typically deducted from an employee's gross weekly or monthly earnings. This makes it convenient for employees because there are no payment dues to remember. Automatic deductions also ensure that the policy remains in force as long as the employee continues to work for the company.
How is Group Life Insurance Taxed?
If an employer provides group life insurance coverage up to $50,000, the cost of that coverage is generally not considered taxable income to the employee. Any coverage exceeding this amount may be subject to taxation. The value of the excess coverage, known as "imputed income," is added to the employee's gross income and taxed accordingly.
How to Get Group Life Insurance
Often facilitated through an employer or organization, obtaining group life insurance is typically a straightforward process:
Check with your employer or human resources department to determine if your company offers group life insurance and if you're eligible.
If eligible, you may need to enroll during a specific enrollment period, such as when you're newly hired or during an annual open enrollment window.
Select the type and amount of coverage that suits your needs. Some employers offer basic coverage at no cost, with options to purchase additional coverage.
Understand the Terms
Review the policy's terms, including any exclusions, limitations and the potential for conversion to an individual policy if you leave the organization.
Stay informed about any changes to the policy and ensure that beneficiary information is up to date.
What Happens to Group Life Insurance When You Retire?
A group life insurance policy is tied to your employment. This means that if you retire, are terminated or resign, your policy and coverage will end. Some policies may offer the option to convert your coverage to an individual policy upon retirement. Upon conversion, the premium will be your responsibility.
Before deciding to convert your coverage, review the costs and benefits carefully and consider other options, such as purchasing a new individual policy.
Is Group Life Insurance Right for You?
Whether group life insurance is a good idea depends on your unique circumstances and insurance needs. The company controls group life policies, so if you need something flexible, you might want to consider other options.
Generally, group life insurance is suitable for employees who don’t require a large amount of coverage because it’s an affordable way to have enough coverage to pay for funeral expenses. It might also benefit employees with pre-existing health conditions because it doesn't require a medical exam.
This type of policy may not be sufficient for those with heavy financial obligations, such as primary breadwinners. Generally, the best life insurance policy can ensure your loved ones are fully protected.
There is typically no downside to accepting a group life insurance policy when it is offered as a company benefit for employees. Though coverage is relatively low, the policy won’t affect your budget as there is no monthly cost to you.
— Mark Friedlander, Director, Corporate Communications, Insurance Information Institute
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Frequently Asked Questions About Group Life Insurance
Group life insurance is a convenient way to get coverage, but it might not be for everyone. We’ve answered common questions about group life insurance to help you get started.
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- Internal Revenue Service. "Group-Term Life Insurance." Accessed August 15, 2023.