What Is Group Term Life Insurance? What It Is, How It Works, Pros & Cons

What Is Group Term Life Insurance?

Group term insurance is a document known as one certificate that contains temporary coverage for a group of people. The standard group is a company, where the contract belongs to the employer who offers coverage for employees as a benefit. Most employers provide, at no cost, the base amount of group coverage plus optional amounts of coverage purchased by employees for themselves, their spouses and children. Group term is also sold through associations and professional organisations.

Since group term life insurance is very inexpensive, often money back, participation among individuals at mid-stream is quite high.

Key Takeaways

Employees are offered basic group term life insurance as a part of the benefits package in many organisations without paying any cost.

You can often purchase additional coverage for yourself or your family members.

If you are leaving a full-time job, then you might be able to convert a group term-life policy to an individual life insurance policy; however, your premium will increase.

It would be the best idea to reinsure, having both the group term life insurance and an individual life insurance policy.

How Group Term Life Insurance Works

Group life insurance is available in the workplace to 57 per cent of private company employees and 83 per cent of government employees. In contrast, the US Bureau of Labor Statistics shows that of companies that offered a life insurance benefit in March 2017, coverage was provided as group term life insurance to 43 per cent of private companies and 70 per cent of government employers. Group term life insurance is offered to employees who meet eligibility criteria, such as being a permanent employee who has been with the company for at least 30 days. This type of insurance can be adjusted for qualifying life events or during a typical open enrolment period.

Coverage is generally related to the insured covered employee‘s annual salary, and premiums are assessed on a worker’s age. Insurance firms usually pay most or all the premiums for base insurance. Extra amounts, typically multiple of the worker’s annual salary, are often offered to the worker for an extra premium.

Like other forms of insurance protection against losses resulting from death, group term pays a death benefit to the beneficiary you name in the event of your passing while the policy is in force, and insured members are typically given certificates of insurance as evidence of coverage.

Unless the company you leave provides portable benefits, you might not be able to ‘take’ your group term life insurance ‘with you’, in the event that you change jobs. Group term life insurance you might have through your employer .

Advantages and Disadvantages of Group Term Life Insurance

For newer employees or younger hires, group term coverage is usually cheap (and certainly less expensive than individual term insurance once all the taxes are paid), and underwriting is not usually required. All eligible employees are by default covered without taking a health exam or answering questions. But one of the shortfalls of group term coverage is that, unlike individual term insurance, which locks in a premium rate for 20-30 years, most group plans have rate bands in which the cost of insurance automatically increases in increments (eg. at age 30, 35, 40, etc.), and the premiums for each change are outlined in the plan document provided by your employer.

Despite its low cost, group life insurance might not adequately cover most families. Employers – or association groups that offer the insurance – often limit the total amount of coverage they’ll provide to members or employees across factors such as tenure, base salary, dependents, and employment status. Participants can’t choose the coverage amounts (or riders) that might be appropriate for their personal needs; they have no choice but to take what the group offers them.

Thirdly, group term coverage is usually discontinued when the employee is no longer employed there. Some employers will allow a former employee to continue group term coverage under what is often called a porting provision. Or, a former employee may have the option to convert the group term to an individual permanent policy. The conversion option will vary, will not necessarily be automatic, and will generally require underwriting. For this reason, an employee might get offered a policy that could incur a significantly larger premium. In addition, the available policies at conversion are usually limited and might not offer the most competitive product.

Other employers might have only accidental death ‥ dismemberment (AD ‥ D) insurance. AD‥D policies cover only deaths resulting from an accident (rather than by natural means), and they often contain many exceptions. Reading fine print about your group coverage is essential to your comprehension of your benefits.

Requirements for Group Term Life Insurance

Usually, enrollment in base coverage is automatic for all eligible employees. Eligibility requirements vary by plan and employer, but can include: working established hours per week; being an employee for a specified period of time; or maintaining membership in a fraternal organisation, trade group, or charitable group, for membership-based group term life sold by associations.

Supplemental group term insurance is another factor. Employers can offer additional coverage for the employee beyond the base insurance, and supplemental insurance for a spouse and/or children. This coverage may allow individuals to enrol only at hiring or when they have an event known as a qualifying life event – the birth of a child is often such an event. In other plans, you can add supplemental group term coverage during an open enrolment period.

Extended coverage is available in many situations, but with underwriting. Commonly called simplified issue coverage, the underwriting usually involves the insurance applicant answering questions to see whether they are eligible for the additional coverage, rather than a physical examination. The insturance company then chooses whether or not to offer the additional coverage.

Special Considerations

One way to provide employees with a tax-free benefit is to offer them group term life insurance coverage up to $50,000. Any employee coverage purchased above $50,000 by an employer must be included on the employee’s W-2 as taxable income.

But you may want to compare it with what you could buy on your own – especially if it is a rider to a group disability insurance policy you own – to see what the best term life insurance policy is, and to review it each year at open enrolment to see if it still suits your needs.

Think of your employer-sponsored group life – single premium, to be exact – as one part of your insurance plan. Figuring out the total amount you need, if any, and how group insurance should fit in, makes sense if you know:

How much life insurance, if any, do you need?

What kind of coverage (term or permanent) makes the most sense?

How long will you need the coverage to stay in force?

Does Group Term Life Insurance Provide Permanent Coverage?

Not so. Group term life is coverage provided for only as long as you are employed with your employer – or paying your premiums via membership association. Term life, as its appellation suggests, is for only a limited timeframe. Unlike permanent insurance, term life coverage does not last a lifetime. It does not build cash value.

Am I Required to Pass a Medical Exam to Apply for Group Term Insurance?

Most group employer-based plans offer the same level of coverage to all who become eligible; you won’t need to show that you’re medically insurable to sign up. But you might have to submit to a medical exam or otherwise certify your health to buy supplemental coverage for yourself or your qualifying family members.

How Does Basic Group Term Life Differ From Supplemental Insurance?

The employer also offers basic group term life insurance, which is provided to all eligible employees at little or no cost. Supplemental coverage is workplace insurance that employees can purchase for an additional premium to receive extra coverage for themselves, their spouse and/or their dependents.

Is Supplemental Insurance a Good Choice?

All those factors depend on what types of insurance you already have, and how much you need. Supplemental coverage for you and your family members kicks in on top of the regular, standard limits offered to you by your employer. Supplemental coverage offers fewer options than other types of policies, so if your health and/or age make you ineligible through a private insurer, it could be a smart move.

The Bottom Line

Group term life insurance purchased through your employer — or your alumni, professional, or other affiliation — is the cheapest, simplest coverage you can get to guarantee that your family will have financial assistance in the event of your death. But your group coverage are temporary in nature and, often, the benefit is too low to cover all your family’s financial needs. Purchase group term with your individual life insurance policy.