What is group life insurance?
Published 1:11 PM EDT, Tue March 5, 2024
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There are several ways to get life insurance, but data show that most people get life insurance through their employer — more than half of private companies offer policies, according to the Bureau of Labor Statistics. Group life insurance is typically offered as term life insurance and provides a small amount of coverage for free.
Enrolling in your employer’s group life insurance plan can have several benefits, like no medical exam and less insurability requirements. However, group life insurance doesn’t offer enough coverage for everyone – plus you may not be able to take your policy with you if you leave your job. In this article, we’ll explain what group life insurance is and look at some of the key features.
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How does group life insurance work?
Group life insurance is a type of term life insurance that’s usually offered through an employer. Because of that, the sign-up process is a little different than if you went to a website or insurance agent to buy a term life insurance policy.
Group life insurance through work
Group life insurance is a type of insurance employers or organizations offer to their employees or members. Group life insurance is usually free if you’re eligible.
Most group life insurance plans provide coverage based on your salary, but higher coverage limits are sometimes available.
“Employees may also be able to purchase additional coverage for themselves or their family,” said Breanne Armstrong, director of insurance intelligence at J.D. Power.
Depending on the organization, group life insurance may be available to all or some employees. For example, an organization may only offer group life insurance benefits to full-time workers.
Features of group life insurance
Group life insurance is typically sold as term life insurance. The policy remains in effect for a certain period, such as 30 years. Many group term life insurance policies are yearly renewable, meaning that coverage is in effect for one year but automatically renews each year if you’re still eligible.
When you leave the job providing the insurance, you usually lose your coverage.
If you pass away during the term, the policy’s beneficiaries receive a death benefit. If you outlive the term, the policy’s beneficiaries don’t receive any money.
Unlike permanent life insurance, term life insurance has no cash value component. Additionally, you usually lose your group life insurance coverage when you change jobs.
One of the biggest benefits of a group life insurance policy is that most don’t require a medical exam or detailed health questionnaire. This can make it easier for older people or individuals with preexisting health conditions to get approved for life insurance or get a more affordable rate.
Eligibility and enrollment process for group life insurance
Enrolling in group life insurance is simple. If your employer offers group life insurance and you meet the eligibility requirements, you can enroll as soon as you start the job. Your employer will provide the policy’s information, coverage limits and out-of-pocket cost (if any). Once you enroll in the plan, your benefits administrator typically notifies you when your policy takes effect.
Group life insurance coverage limits
While most group life insurance plans are term policies, some companies provide permanent ones. While term policies cover you for a set time (like 30 or 40 years), a permanent life insurance policy stays in effect for your lifetime and has a cash value component.
Group life insurance plans typically provide small coverage amounts. For example, your policy’s death benefit may only equal one or two times your annual salary. If you make $70,000 per year, your maximum death benefit may only be $140,000 — that may not be enough coverage, depending on your situation.
Some companies offer two types of group life insurance: basic and supplemental. Basic group life insurance provides the lowest coverage and is typically free. Supplemental group life insurance, which is sometimes referred to as voluntary life insurance, provides more coverage, but you have to pay for it.
How much does group life insurance cost?
Basic group life insurance is often free for employees, meaning your employer covers the premium for the duration of your employment. However, if you purchase supplemental group life insurance, you pay the premium through automatic paycheck deductions.
Compared to individual life insurance, group life insurance is much more affordable. Even if you purchase additional coverage, the rates are typically lower, especially if you’re young and in good health.
Advantages of group life insurance
Group life insurance is a good option for many people. Here are some of the advantages of this type of life insurance coverage:
Affordable rates
Compared to individual life insurance, the premiums for group life insurance are much lower. “Group life insurance provides a basic level of life insurance coverage to a large number of individuals, which typically makes it a more cost-effective option,” Armstrong said.
No medical exam
Most people who enroll in their company’s group life insurance policy are not required to take a medical exam or answer any detailed health questions. If you meet your employer’s enrollment requirements, you’re typically able to get coverage regardless of your age or health.
Easy to enroll
Getting life insurance through your employer is quick and simple. There’s no lengthy application, medical exam or waiting period before you get approved. Once you fill out any required paperwork and designate your beneficiary, your benefits administrator will handle the rest for you.
Group life insurance for employers
Group life insurance can be a great benefit to give your employees. However, there are some things you should consider before offering group life insurance:
- Who qualifies for coverage: First, you need to determine which employees will qualify for coverage. Decide whether you will offer coverage to all employees, full-time employees only or employees who work over a certain number of hours per week.
- Type of insurance you will offer: As the employer, you get to choose what type of life insurance you will offer. You might offer basic life insurance only or basic and supplemental plans. Some employers also offer riders, like an accidental death and dismemberment (AD&D) rider, which provides additional coverage.
- Amount of coverage you will offer: Before you offer group life insurance, determine how much coverage you’ll provide. It’s common to offer a fixed amount of coverage or a varying amount of coverage based on each employee’s salary.
While many life insurance companies sell group benefits, it’s important to choose the best provider for your company’s needs. Compare insurers based on their financial strength, customer satisfaction, customer complaints and cost. You can get quotes from several insurers to see which one can offer you the lowest rate for your group life insurance plan.
Group life insurance vs. individual life insurance
Individual life insurance and group life insurance are very different; each one has its pros and cons.
Ownership and customization
With group life insurance, your employer owns the policy and you are the insured. As the policy owner, your employer makes decisions about the plan and determines how much coverage you are eligible for. The organization typically pays the premium for basic coverage, and you can get supplemental coverage for an extra cost. When you leave the job, you usually lose your coverage.
Individual life insurance is purchased by individuals for themselves or their family through an insurer. If you are the policyholder, you pay the premium. Also, your policy stays with you if you change jobs.
“Individual life policies are much more customizable and offer more options outside of a standard group life policy,” Armstrong said. “The individual is the policyholder, so as long as they continue to pay their premium, their policy stays with them.”
Cash value
Another difference between group and individual life insurance is cash value. Group life insurance policies typically don’t have a cash value component because most are term policies. If you get individual permanent life insurance, such as whole life, your policy will have a cash value account you can usually borrow against or withdraw from.
Odds of approval
Unlike group life insurance, most individual life insurance policies don’t have guaranteed acceptance. So, you might not get coverage if you have preexisting medical conditions.
“Because the underwriting process for individual plans is more thorough, it often requires a medical exam and health history disclosure, which can be time-consuming and affect eligibility,” said Armstrong.
Coverage amounts
It’s also important to consider the difference in coverage limits between individual life and group life. Armstrong mentioned that group life insurance doesn’t offer enough coverage for many people, so it’s common for individuals with group life insurance to also buy an individual policy to meet their family’s financial needs.
Frequently asked questions (FAQs)
Generally speaking, the main customization you get with group life coverage is the ability to change your coverage amount. For example, your employer may allow you to select coverage amounts in $10,000 increments.
While not a “customization,” employers that offer group life insurance may also provide accidental death and dismemberment (AD&D) coverage. An AD&D policy typically provides a payout if you die or lose a limb, finger, toe, and, foot or vision due to an accident.
One of two things will happen: either you’ll lose your coverage or you can move it from a group policy to your own policy. The latter is called “portability” — ask your employer’s HR or benefits department if your group policy has a portability feature. Keep in mind, though, that it’s likely you’ll pay a higher premium for the same policy since your employer is no longer covering part of the cost.
Your group life insurance is not taxable as long as your death benefit does not exceed $50,000. If your policy’s death benefit exceeds $50,000, then the cost of the excess coverage will be taxed as income. The IRS provides a simple table to calculate the cost of excess coverage, with costs ranging from 5 cents to $2.06 per $1,000 of coverage for one month.
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This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.
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