What Is Group Term Life Insurance?
Group term life insurance is a benefit frequently offered by employers for their employees. Many employers provide, at no cost, a base amount of group coverage as well as the ability to purchase supplemental coverage through payroll deductions. The plans may also offer employees the option to buy coverage for their spouses and children.
- Group term life insurance is a benefit often provided to employees by their employer, typically through payroll deductions.
- Whether to accept group term life insurance depends on how much life insurance is required, what type of coverage is desired, and for how long?
- There are tax benefits associated with group term life insurance—employers are allowed to provide employees with $50,000 of tax-free group term life insurance coverage.
Understanding Group Term Life Insurance
It is surprising how many people fail to consider their employer-sponsored group benefits as part of their overall financial situation. Most people would be wise to examine all coverage options and determine the best strategy to meet their needs.
To help evaluate any group term life insurance coverage, it makes sense to determine:
- 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?
What Amount of Income Is Insured?
The coverage offered through a group plan varies widely among employers. The amount of coverage available may also differ depending on where an employee is situated in the organizational hierarchy. Benefits for management and executives may be more robust than the benefits offered to lower-level or hourly employees.
As a starting point, it is important to read the group term plan to understand the amount and types of compensation that are covered. Many group plans only cover an individual's base salary. Other forms of compensation may be excluded, such as bonuses, commission, reimbursement, or incentive that are reported as income—for example, an auto reimbursement or restricted stock award.
Group term coverage is generally inexpensive for the young. However, the rates go up quickly as individuals age. Participants in a group plan may not be required to go through underwriting. In a group plan, all eligible employees are automatically covered. Consequently, premiums are based on that pool of employees regardless of their health. Most plans also have rate bands in which the cost of insurance automatically goes up in increments, for example, at ages 30, 35, 40, etc. The premiums for each rate band are outlined in the plan document. If you are in good health, part of your premium could be helping to subsidize other employees who might otherwise be rated as uninsurable.
For group plans, all employees are typically automatically enrolled in the base coverage once they meet the eligibility requirements. Requirements vary and can include working a certain number of hours per week or a certain amount of time as an employee. The availability of supplemental group term coverage differs. In some plans, it is only available when an individual is initially employed or upon the occurrence of life events, such as the birth of a child. In other plans, supplemental group term coverage can be added during open enrollment periods. Supplemental coverage may require underwriting. Usually, it is a simplified underwriting process whereby the insurance seeker answers some questions to determine eligibility rather than having to go through a physical exam. The carrier then decides whether or not it will offer coverage.
Additionally, some plans offer the option to purchase permanent coverage with simplified underwriting and may allow the employee to buy a limited amount of group coverage for a spouse and children (age eligibility for children varies).
Portability of Coverage
Since a group term is linked to ongoing employment, the coverage automatically ends when an individual's employment terminates. Some insurers do offer the option to continue the coverage by converting the group term to an individual permanent policy. The conversion options vary, may not be automatic, and could require underwriting. Consequently, an individual could be rated and offered a policy with a much higher premium. Also, the policies available when converting may be limited and are not always the most competitive products.
Taxation of Benefits
As a benefit, employers are allowed to provide employees with $50,000 of tax-free group term life insurance coverage. According to IRS code Section 79, any amount of coverage above $50,000 that is paid for by an employer must be recognized as a taxable benefit and included on the employee's W-2 as imputed income. The taxable amount is calculated using the IRS Premium Table and is subject to Social Security and Medicare taxes.
If an employer does differentiate, which is allowed, by offering different amounts of coverage to select groups of employees, the first $50,000 of coverage may become a taxable benefit to certain employees (corporate officers, highly compensated individuals, or owners with 5% or a greater stake in the business).
Group coverage is linked to ongoing employment. If an individual changes jobs, decides to stop working for a period, leaves to open their own business, or retires, the coverage will stop. This puts an individual at risk if they have health issues, if a new employer offers different benefits, or if they are not working. If an individual needs to maintain the coverage, they could be forced to convert the group term to a permanent policy. Or, they could be left without any coverage.
Group coverage also becomes more expensive as individuals age. A healthy individual may be able to buy a 20- or 30-year term policy that locks in the coverage at lower cumulative cost. In addition, owning an individual policy ensures that the insured is never without coverage or forced to buy a more costly policy later in life. It is important when buying an individual policy to make sure that it offers a conversion option.
Even if you determine that a term policy is the a good fit for your circumstances, it's still worth comparing your employer's plan with those of other firms to ensure you're getting the best term life insurance policy possible.