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 purchase coverage for their spouses and children.
It’s really surprising how many people fail to consider their employer-sponsored group benefits as part of their overall financial situation. You should take some time to think through your coverage options and determine the best strategy to meet your needs.
To help evaluate any group term life insurance coverage, it makes sense to determine:
- How much life insurance, if any, do you actually 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 Your 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 you are 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’s important to look at the group term plan document so you understand what amount and kinds of compensation are actually covered. Many group plans only cover your base salary. Other forms of compensation, such as a bonus, commission, reimbursement or incentive that is reported as income—for example, an auto reimbursement or restricted stock award—could be excluded.
Group term coverage is generally inexpensive when you are young. However, the rates go up very quickly as you get older since the 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 would be outlined in the plan document. So if you are in good health, part of your premium could be helping to subsidize other employees who would might otherwise be rated as uninsurable. (See also: Getting Life Insurance in Your 20s Pays Off.)
Usually in group plans, all employees are 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 having been employed for a certain amount of time. The availability of supplemental group term coverage differs. In some plans, it is only available when initially employed or upon the occurrence of life events, such as the birth of a child while in other coverage it can be added during open enrollment periods. Supplemental coverage may require underwriting. Usually, it is a simplified underwriting process in which you answer some questions to determine eligibility rather than having to go through a physical exam. The carrier then decides whether or not it will offer you coverage.
Additionally, some plans offer the option to purchase permanent coverage with simplified underwriting and may let the employee buy a limited amount of group coverage for a spouse and children (age eligibility for children varies).
Portability of Coverage
Since group term is linked to your ongoing employment, the coverage automatically ends when your 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, you 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 your employer has to be recognized as a taxable benefit and included on your 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 greater stake in the business).
The Bottom Line
Group coverage is linked to your ongoing employment. If you change jobs, decide to stop working for a period of time, leave to open your own business or retire, the coverage will stop. This puts you at risk if you have health issues and a new employer offers different benefits or if you are not working. If you need to maintain the coverage you could be forced to convert the group term to a permanent policy. Or you could be left without any coverage.
Group coverage also becomes more expensive as you get older. If you are healthy you may be able to buy a 20- or 30-year level term policy that locks in the coverage at lower cumulative cost. In addition, owning an individual policy ensures you will never be without coverage or be forced to buy a more costly policy later in life. If you do buy an individual policy, be sure to purchase one that offers a conversion option.
There are many pros and cons to group term coverage. Understanding your insurance needs and goals in life can help you make an educated and financially sound decision.