Group term life insurance is a low-cost insurance option that provides employees with temporary financial protection. Its death benefit can be used by beneficiaries to cover anything from daily living expenses to future mortgage payments.
In this brief overview, we'll provide useful information on group term life insurance coverage. By the end, you'll know how to take full advantage of the group plans offered by most employers.
What Is Group Term Life Insurance?
Group term life insurance is a type of life insurance contract that's issued to an organization instead of an individual. Typically, it's purchased by a company or labor organization as part of its employee benefits package. In a group term contract, the employer (not the individual) is considered the policy owner.
The employer is usually responsible for paying the premiums for basic group term insurance. If desired, employees can also purchase supplemental coverage for their families. Many employers get the premium payment from an individual's salary in the form of payroll deductions.
While most types of term life insurance coverage stay in effect for 5, 10, 20, or even 30 years, group life insurance policies are only active while the employee is a part of the policy-holding organization.
For that reason, group term coverage is generally best as supplemental life insurance. We’d recommend that you still have life insurance that can protect you even if you’re no longer with the insured company.
Who Is Eligible For Group Life Insurance?
The employer and the insurance company set the criteria for group life insurance coverage eligibility. Typically, those who work a certain number of hours per week or those who have a certain tenure are considered eligible employees.
Note that some insurers only provide coverage to those who are under the age of 65. People above this age may still qualify for group term life insurance, but they may receive lower coverage for the same premiums.
Eligible employees don’t have to undergo the full underwriting process. But while employees don't have to take a medical exam to get coverage, they might still be required to provide information about their health.
What Do Group Life Insurance Plans Cover?
The base amount of coverage for group life insurance is usually equal to the employee's annual salary. Any additional salary they receive from consulting, fieldwork, and other duties is also included in the base amount. Bonuses, overtime pay, reimbursements, and incentives are excluded from the computation.
Other factors may affect the base amount of coverage, such as tenure, marital status, job duties, number of dependents, and employment status. For example, corporate leaders or owners with a greater stake in the business typically receive higher coverage.
It's important to consult a financial professional to figure out the coverage amount you need on top of the base coverage offered to you by your employer. Most industry experts recommend that the amount of your insurance coverage should equal your annual salary multiplied by the years it will take until your youngest child turns 18.
Group Term Life Insurance Add-Ons
In most cases, a group term policy can be customized. In this section, we'll discuss the additional features that can be added to a typical term life insurance policy.
Dependent Group Coverage
Employees can buy supplemental group life insurance for their dependents at an additional fee. Additional insurance comes with a benefit that ranges from $1,000 to $20,000 per family member, depending on the insurer.
Employees may purchase supplemental group plans during the open enrollment period, which is the period when their insurance coverage can be adjusted. You typically can’t list new people as dependents outside of the open enrollment period, even if you go through significant life events like the birth of a child.
Keep in mind that there may be additional eligibility requirements to purchase supplemental coverage. You may be required to answer a questionnaire to determine your eligibility.
If you're planning to enroll children for supplemental life insurance, they usually have to be at least 14 days old but not older than 18 to be eligible. You must provide evidence of insurability (EOI), which is a document that indicates you are healthy enough to receive insurance coverage.
Group Accidental Death & Dismemberment Insurance (AD&D)
This group plan pays an additional death benefit if the insured person passes away due to an accident. The insured person can also receive living benefits from the term life insurance policy if they experience some form of dismemberment, such as losing their sight or a limb.
Group Business Travel Accident Insurance
This group plan provides an additional benefit for employees who die in an accident while traveling for business. If you travel a lot for work, you should consider this extra coverage option.
Waiver Of Premium Policy
Becoming disabled due may prevent a person from fulfilling their work duties, which may affect their income. That’s why it pays to have a waiver of premium rider for your group life insurance. This allows the insured disabled person to retain their group coverage without making additional premium payments.
The coverage will continue throughout the term period, which typically lasts up to one year for group term life insurance.
Frequently Asked Questions About Group Term Life Insurance
Group life insurance plans are fairly simple, but the more you know, the more you can take full advantage of your coverage. In this section, we'll answer some of the most frequently asked questions about this type of policy.
When will the life insurance plan take effect?
Employees and their dependents are considered insured on the date specified by the life insurance company on the plan document. This date is usually based on the day the employer pays the first premium and the day when the employee submits evidence of insurability.
When is life insurance coverage terminated?
Group life insurance is renewed annually as long as you are with the insured company. However, your policy will be terminated if you switch jobs or retire.
What are the life insurance exclusions?
Life insurance benefits are paid out to dependents if the insured dies of any cause except suicide. With AD&D insurance, any death or injury from natural causes/acts of war is excluded.
Do insurance companies offer the option to convert plans to individual life insurance?
Typically, life insurance companies offer the option to convert group coverage to individual whole life policies. This conversion privilege allows you to qualify for an individual policy without having to undergo a physical exam.
You'll likely have to pay to do this, but taking advantage of your conversion option is useful if you have health conditions that would normally disqualify you from buying a fully underwritten life insurance policy. Some conversion options will also require you to pay more expensive premiums.
Can I use my group term life insurance for investing?
No, term life insurance does not come with a cash value, so it doesn't work as an investment vehicle. Only whole life insurance plans come with a cash value. Those who are interested in long-term investing can also put money into their 401(k) or Roth IRA.
Is the employer's premium contribution taxable?
According to the Internal Revenue Service (IRS), the first $50 000 worth of payments provided by employers should not be included in an employee's gross income. Any amount above that will be considered as taxable income.
Is there a benefit for employers?
Employers have more control over how much coverage each employee gets. For instance, you can offer $50,000 worth of coverage for entry-level staff, then purchase more expensive group life insurance for individuals in highly skilled and experienced positions.
Are insurance payments tax-deductible?
Premiums aren’t tax deductible if an employer only offers group term coverage to a few key individuals. The plan should cover 70% of their staff to be deducted from federal tax. Additionally, owners, partners, and sole proprietors are not considered employees, so their insurance is not considered tax-deductible.
What determines the cost of insurance?
Some life insurance companies have rate bands, which means that the cost increases in increments depending on the average age group of your members. Premium payments may also increase if you have many smokers in your organization because it is considered a high-risk habit.
Certain industries come with a higher rate band. For instance, aviation or commercial fishing companies will likely have higher insurance premium rates because their jobs put them at a higher risk of getting into accidents.
Group term life insurance is a useful benefit offered by many employers. Unlike whole life insurance, group term life insurance premiums are usually free or come at a very low cost to members. An employee can even expand their protection by enrolling their family for dependent term insurance coverage.
If you're still wondering how a group policy can be beneficial to you or your company, feel free to contact us at Wesley Insurance, LLC. We'll help you select from a wide range of plans and find the best life insurance policy for your team.