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Group life insurance is a type of life insurance where a single contract covers an entire group of people. Typically, the policyowner is an employer or an entity, such as a labor organization, with the policy covering employees or members of the group.
The core concept of group life insurance is simple: a single policy covers all eligible participants, offering a death benefit in the unfortunate event of an insured’s death. The employer owns the policy and certificates of coverage are issued to its employees. Employers often choose to provide this type of insurance to enhance their benefits package, making their company more attractive to current and prospective employees.
Group life insurance is a straightforward benefit for employees. It is also generally available at a reduced cost compared with policies purchased individually. And in some cases, it is offered without any cost to the employee. (Related: How to make the most of your employee benefits)
“In situations where the premium is paid by the employer, the benefit is tax-free to the employee as long as the coverage is below $50,000,” said Vince Fini, CPA and partner at Whittlesey, an accounting and advisory firm in Hartford, Connecticut. “If the coverage is over $50,000, then the value of coverage exceeding that amount is reported as taxable income on the employee’s W-2. This amount is subject to federal and state taxes as well as FICA tax.”
Group life requires minimal, if any, medical underwriting, which makes it accessible to a broader range of people, including those who might have difficulty obtaining individual insurance due to health issues.
“And where medical evidence of insurability is required, it generally consists of a very short set of questions,” said Eric Gulko, president and director of compliance at Innovo Benefits Group in Concord, Massachusetts.
“Further, when purchasing group life insurance subsidized by the employer, there is very little work on the part of the employee,” Gulko said.
The one main task for employees? Completing the beneficiary designation form. Beneficiaries — those who receive the death benefit — are typically designated by the insured. In the event of an insured’s passing, the death benefit can serve as a financial safety net, helping beneficiaries cover expenses such as funeral costs, daily living expenses, and any outstanding debts. (Related: Beneficiary mistakes)
The key benefit for your employer is value.
“Group life is not nearly as expensive to an employer as other benefits plans like medical, dental, or even disability plans,” said Gulko.
Why does this matter? Because employers want to offer the greatest number of benefits to attract and retain good employees. When your employer saves money on one benefit, it creates the opportunity for them to invest in other benefits.
Who is eligible?
Group life insurance coverage is usually extended without a medical examination, primarily because the risk to the insurer is spread across many individuals. If you were to purchase a policy on your own, you would likely have to undergo a health screening before the policy would be written.
Factors that affect eligibility include:
- Employment status: You typically must be an active, full-time employee or a member of the organization to qualify for coverage. Part-time employees may be eligible if they meet certain hour requirements.
- Waiting period: There is often a period after you begin employment when you’re not yet eligible for coverage. This period can vary from a few days to several months.
- Group membership: As the name implies, group insurance eligibility may require membership in a specific class defined by the policy, such as all employees of a certain status (e.g., non-union employees, executives) or members of a labor organization.
- Minimum hours: Some group policies require that employees work a minimum number of hours to be eligible (e.g., at least 30 hours per week).
- Eligibility period: There's typically a specific period in which an employee can enroll in the group life insurance plan, such as when first hired or during open enrollment. Outside of this period, you may have to provide evidence of insurability.
- Age limits: There can be age-related restrictions, with coverage being reduced or ending when an employee reaches a certain age, often aligning with retirement age.
Coverage Amounts: How is it calculated?
Employers have several choices when determining their group life insurance coverage amounts, such as:
- A multiple of annual salary: This is the most common method, where the policy might offer a death benefit equal to 1– 3 times your annual base salary.
- Level or rank: In some cases, the coverage amount is determined by the employee's rank or position within the organization. For example, executives might have higher coverage levels compared with managers or other staff members.
- Flat coverage amount: Some group life policies simply provide a flat amount of coverage for all employees, regardless of salary or position. This approach simplifies the administration of the policy and ensures that all employees have at least a minimum level of coverage.
In all instances, there may be a cap on the coverage, ensuring that the death benefit remains affordable for the employer.
Reduced cost, reduced benefits?
The cost savings come from the insurance carrier spreading the risk across a group of insured individuals, rather than by offering a lesser quality of coverage. Since the cost-per-insured is typically lower than individual policies, group life can be a good value for many people, especially for younger people and people who may have health concerns. However, for older people and people in great health, individual coverage can often be cheaper in the long run.
It's also important to understand the type of life insurance, term or permanent, involved in the group plan. Term life insurance offers protection for a specific period of time, whereas permanent life insurance offers protection for a lifetime, albeit at a higher premium. (Related: Term vs. perm life insurance: 3 considerations)
A defining feature of many group term life insurance plans is that they lack portability, meaning the protection remains in force only until the individual's employment terminates or until the policy terms change. This ties the insurance protection to the tenure of your employment. However, there are group term plans that allow for portability for an extra fee as well as portable plans offered through professional societies or trade associations. It’s an important feature to check on when reviewing a group term plan.
But permanent plans, like group whole life insurance or group universal life insurance, are permanent products with the right to keep coverage at the current premium when you leave an employer or the group policy is terminated.
Another consideration is that a group life insurance plan may not provide the level of coverage needed by some individuals, which, along with portability, is another reason for some people to own their own individual life insurance policy. (Related: How much life insurance do I need?)
While experts urge employees to always take their employer’s group life insurance plan if it’s offered at no cost, there are certain benefits you’ll need to understand to determine if you have adequate coverage. (Related: Is group life insurance enough?)
Benefits to look for in your plan
Group life insurance policies typically offer a core set of standard benefits that help provide financial security, including:
- Death benefit: The primary benefit is the payment of a lump-sum death benefit to the designated beneficiary upon the insured employee's death. “This benefit is generally tax-free to the beneficiary,” said Fini.
- Accelerated death benefit: Many policies include an accelerated death benefit feature, which allows the insured to receive a portion of the death benefit early if they are diagnosed with a terminal illness and have a limited life expectancy.
- Accidental death and dismemberment (AD&D): This benefit provides additional coverage if the insured dies or suffers a severe injury due to an accident. The dismemberment coverage typically pays for the loss of limbs, fingers, sight, and other serious injuries.
- Dependent coverage: Some group policies offer optional coverage for the insured's spouse and dependent children at an additional cost. Eligibility requirements may include dependent age, so always ask for coverage details.
- Waiver of premium: If you become disabled and are unable to work, you may be able to skip premium payments while keeping the policy in force.
- Portability: Many group life insurance policies allow employees to keep their coverage if they leave the company, although they may pay higher premiums than the group coverage and face age restrictions. “Since the employee is typically bearing the cost of the policy, there is no additional tax implication when an employee takes their coverage with them,” said Fini.
- Conversion privilege: Employees may have the option to convert their group coverage to an individual policy if they leave their employer, typically without having to undergo a medical exam. “However, portability often offers more favorable rates than converting to an individual product,” Gulko said.
Other features on group life insurance may include travel assistance, identity theft benefits, and bereavement counseling.
Filing a claim
In the unfortunate event that you or a loved one needs to file a claim, you’ll want to work closely with your employer’s human resources or benefits department. During that time of loss, you’ll appreciate help navigating the claims process even if insurers provide detailed documents that clearly outline the steps and information required as well as the timeline.
Many insurers offer claim forms available for download from their website and electronic submission to streamline the process. Something else to prepare for are documentation requirements. It may seem callous in the moment to request proof of a loved one’s death, but insurers are simply trying to keep costs down for all through antifraud measures.
Lastly, insurers may offer different payout options, such as lump-sum payments or annuities, to meet different beneficiary needs. It can be beneficial to discuss these options with a financial professional. (Related: 8 ways to use a life insurance benefit wisely)
Is your employer offering enough coverage?
“The total amount of group life insurance available at work is not meant to fill all needs forever. The insurance generally has somewhat limited caps, and it typically gets reduced as you reach retirement age,” said Gulko.
In addition to the basic coverage provided by the employer, employees may have the option to purchase supplemental life insurance through their employer's group plan. Such offerings are usually term insurance. This supplemental coverage could be a multiple of their salary or a specific amount chosen by the employee.
Such supplemental options often require the employee to pay additional premiums and undergo a medical examination or health questionnaire, especially if elected outside of the initial enrollment period or beyond certain coverage limits.
You may still come out ahead, as supplemental term insurance plans are usually cheaper than an individual policy. However, such coverage is not permanent and usually terminates with employment. Conversion privileges are mandatory in group term insurance plans, but conversion is frequently to an individual permanent life insurance policy at your current age, which will also add to the cost. (Calculator: How much life insurance do I need?)
“Moreover, when employees purchase insurance through the company, they are able to pay for it over time through automatic payroll deductions, versus having to pay a larger individual policy premium,” said Gulko.
Conclusion
Group life insurance is a key benefit within the collective employment environment, offering streamlined and often cost-effective coverage. It's a testament to an organization's commitment to the well-being of its employees and their families, ensuring that in times of loss, financial support is available.
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