Group Life Insurance in Canada

For many Canadians, life insurance is a crucial component of their financial planning, providing peace of mind and financial security for their loved ones in the event of their untimely death.

While individual life insurance policies are a popular choice, group life insurance plans offered through employers or associations can be an affordable and convenient option. In this guide, we’ll explore the ins and outs of group life insurance in Canada, including what it covers, how it works, who is eligible, and its advantages and disadvantages.

Group life insurance is a life insurance policy offered through an employer as part of an employee benefits package that covers a group of employees under a single policy. The employer purchases the policy from a life insurance company and determines eligibility, coverage amounts, and other plan details.

With group life insurance, the employer pays for all or a portion of the premiums. In return, employees receive a guaranteed amount of tax-free coverage without needing to provide medical evidence.

If an employee passes away while covered under a group life policy, their designated beneficiary will receive a lump sum payout. This death benefit can be used to help cover funeral costs, daily expenses, debt, and other financial obligations for surviving family members.

Group life insurance policies have eight key features, including:

1. Lower costs: Because the risk is spread across a larger group, premiums for group life insurance are often lower than individual policies.
2. Employer/association-sponsored: The employer or association sponsoring the plan negotiates the policy terms and pays some or all of the premiums.
3. Non-Evidence Maximum (NEM): This is the guaranteed coverage amount that employees can receive without needing to provide proof of good health.
4. Maximum Benefit: This caps the total coverage amount per employee, regardless of earnings. Maximums help limit the insurer’s risk exposure.
5. Premiums: Younger employees typically pay lower premiums. Rates increase around age 50. Employers may cover some or all costs.
6. Waiver of Premium: If an employee becomes totally disabled before age 65, future premiums may be waived while coverage continues.
7. Eligibility: Full-time employees who work a minimum number of hours per week are eligible. Coverage ends at retirement.
8. Portability: Employees can convert group coverage to an individual policy when leaving an employer.

Group life insurance begins when an employer chooses a policy, working with an insurance broker or benefits advisor to select the coverage amounts, premiums, eligibility rules and other policy details that best fit their workforce.

Once the group policy is in place, eligible full-time permanent employees are automatically enrolled, typically within 31 days of their employment start date. No medical exam is required.

Employees then name primary and contingent beneficiaries who will receive the payout if they pass away while covered under the active policy. Insurance premiums are paid primarily via payroll deduction, splitting the costs between the employer and employees.

Throughout the year, as employees join or leave the company, the employer provides these updated eligibility lists to the insurer to manage the coverage rosters. If an employee passes away while covered by an active group life policy, the full benefit amount is paid out tax-free to their named beneficiaries.

Then, if an employee leaves the company or is terminated, their group life insurance coverage will end, but they may have the option to convert to an individual policy if desired.

Eligibility for group life insurance depends on the specific rules set by the employer or association sponsoring the plan. Typically, eligibility is based on factors such as:

1. Employment status: Most group life insurance plans require employees to work a minimum number of hours per week or have a certain length of service with the company to be eligible for coverage.
2. Membership status: For association-sponsored plans, eligibility may be based on active membership in the organization.
3. Age: Some plans may have age restrictions for eligibility or may reduce coverage amounts for older members.
4. Occupation: Certain occupations may be excluded from coverage or subject to higher premiums due to increased risk.

In most cases, eligible employees or members are automatically enrolled in the base group life insurance plan, although they may have the option to opt out or purchase additional coverage. Dependents like spouses and children may also be eligible for coverage under the plan.

For group policies, insurance carriers use the demographics of the overall employee population to determine pricing and premium rates. Factors influencing rates include:

• Age distribution of employees
• Male to female ratio
• Salary ranges
• Industry risk class
• Prior claims history
• Total number of lives covered

In most cases, employers pay for a percentage or all of the group life premium costs. Any portion of premiums owed by employees is deducted directly from paychecks on a pre-tax basis.

For younger employees in their 20s and 30s, monthly premiums are very affordable – often under $20 per month. Rates start increasing around age 50 and may double by age 60. Monthly costs for seniors can be $40-50 depending on the death benefit amount.

Employees can also pay additional premiums for optional supplemental coverage above the basic plan’s guaranteed amounts if they need more protection.

There are four main types of group life insurance benefits:

• Employee Basic Life – The employer fully pays for this basic coverage, and equals 1-2 times the employee’s salary.
• Employee Optional Life – Employees can purchase additional coverage at their own expense through payroll deductions.
• Dependent Basic Life – Some plans offer a small amount of coverage for dependents at no cost.
• Dependent Optional Life – Employees can pay to add extra dependent coverage.

Source: Group Life Insurance – groupbenefits.ca

While both offer important financial protection for families, group life insurance and individual life insurance have some key differences:

Individual policies allow full customization and control but can cost more. Group life insurance offers guaranteed, affordable coverage for employees, with the trade-offs of less control and non-portable coverage.

Group life insurance offers several advantages, including:

• Low cost – Group rates are significantly lower than individual life insurance.
• Easy enrollment – No medical exam required. Coverage is guaranteed for eligible employees.
• Convenience – Premiums are automatically deducted from paychecks.
• Peace of mind – Employees have assurance their family will receive a death benefit.
• Tax benefits – Premiums paid by employers are tax-deductible business expenses.

However, there are some potential disadvantages to consider as well:

• Limited coverage – Typically 1-2 times annual salary, which may need to be improved.
• Not portable – Coverage ends if an employee leaves the job or the policy is cancelled.
• No cash value – Group term life policies do not build equity like permanent life insurance.
• Loss of control – The employer decides policy terms, coverage changes, and cancellations.
• Conversion challenges – Converting to individual policy can be expensive, and requirements vary by province.

Overall, group life insurance provides an affordable way for employers to offer essential life insurance protection to employees. But there are some limitations to consider. Supplementing with individual life insurance may be recommended for some employees.

There are eight key factors that define a group life insurance plan offered by an employer:

Eligibility – The employer sets eligibility rules for employees to enroll in the group life plan. Typical requirements are being a full-time employee and completing an initial probationary period of 3-6 months.

Basic Coverage Amount – The basic life insurance coverage funded by the employer is usually set at 1-2 times the employee’s annual salary. Some plans offer a flat amount, like $50,000.

Maximum Benefit – All group plans have a maximum benefit limit, such as $500,000. Payouts cannot exceed this ceiling.

Non-Evidence Maximum – This is the coverage amount an employee qualifies for without providing evidence of insurability. It’s often equal to the basic coverage amount.

Optional Coverage – Employees can usually purchase extra coverage in addition to the primary benefit up to the maximum benefit limit.

Premium Payment – The employer pays premiums for basic coverage, and the employee pays optional coverage premiums through payroll deductions.

Policy Term – Most group life insurance plans are annual term policies that renew each year. The employer has the option to renew the group policy annually.

Portability – If an employee leaves their job, they may be able to convert group life coverage to an individual policy without providing evidence of insurability.

Employers should compare plans from top Canadian insurance carriers to find the right group life insurance for their workforce and budget.

If you have access to group life insurance through your employer or association, there are several steps you can take to make the most of this valuable benefit:

1. Review your coverage: Carefully review your group life insurance policy terms to understand what is covered, the coverage amounts available, and any limitations or exclusions. If you have questions, don’t hesitate to ask your HR representative or the plan administrator for clarification.
2. Assess your needs: Consider your current financial situation, debts, and future obligations to determine whether the coverage available through your group plan is sufficient to protect your loved ones. If not, consider purchasing additional coverage through a supplemental group plan or an individual policy.
3. Name beneficiaries: Be sure to designate one or more beneficiaries for your group life insurance policy and keep this information current. If you don’t name a beneficiary, the death benefit may be paid to your estate, which can delay the payout and expose the funds to probate fees and taxes.
4. Take advantage of additional benefits: If your group life insurance plan offers additional benefits like accidental death and dismemberment coverage or accelerated death benefits, ensure you understand how these features work and how to access them.
5. Consider portability: If you leave your job or the sponsoring organization, determine whether your group life insurance coverage is portable or convertible to an individual policy. This can help you maintain coverage without starting from scratch with a new policy.
6. Coordinate with other coverage: If you have other life insurance policies in addition to your group coverage, coordinate your beneficiary designations and coverage amounts to ensure a comprehensive and cohesive protection plan.
7. Review and update regularly: Life changes like marriage, divorce, the birth of a child, or a new mortgage can impact your life insurance needs. Review your group life insurance coverage regularly and make updates as needed to ensure it continues to meet your needs.

By taking these steps, you can make the most of the valuable protection provided by your group life insurance plan and ensure that your loved ones are financially secure in the event of the unexpected.