Group term life insurance is a type of group life insurance policy that covers a group of people, usually company employees or members of an organization. Unlike individual life insurance plans that insure one person, group term life insurance policies cover the entire group under a single master policy.
This article will cover everything you need about group term life insurance, including how it works, who is eligible, costs, advantages and disadvantages, features, how to get coverage, and frequently asked questions.
What is Group Term Life Insurance?
Definition of Group Term Life Insurance
Group term life insurance provides life insurance protection to a group of people under a single master policy. Companies usually offer it as an employee benefit to provide affordable life insurance coverage for their workforce. The employer owns the policy and also pays all or part of the premiums. Employees are issued certificates of insurance that outline their coverage details.
The insurance company underwrites the entire group, not each member. Therefore, employees can get group life insurance without medical exams or health questionnaires. Coverage is guaranteed as long as eligibility requirements are met.
Group-term life insurance policies only provide temporary life insurance protection. Unlike permanent life insurance policies that last a lifetime, group term life coverage ends when the policy terminates or the employee leaves their job.
It is a cost-effective way for employers to provide valuable benefits to employees. It also allows individuals to obtain life insurance protection that may be unaffordable or unavailable on the individual market.
How Group Term Life Insurance Works
With group term life insurance, the employer purchases a master policy from a life insurance company that covers all eligible employees. The employer owns the master policy and has the flexibility to select different benefit amounts, such as:
- 1x annual salary
- 2x annual salary
- Flat coverage amount (e.g. $50,000)
Source: https://www.simplybenefits.ca/blog/how-employee-group-life-insurance-works/
Employees who meet the eligibility requirements are issued individual certificates of insurance that outline their personal coverage details under the group policy. This certificate is not the actual life insurance contract. It simply summarizes the employee’s benefits.
The employer pays all or most of the premiums. Employees may purchase supplemental coverage at an additional cost through payroll deductions.
If an insured employee dies while covered by the group policy, the death benefit will be paid to their designated beneficiary. The funds can help the family pay for funeral costs, mortgage, debts, college tuition, and daily living expenses.
Types of Group Term Life Insurance Policies
There are several types of group-term life insurance policies employers can offer their workforce:
- Basic Life insurance โThis coverage is provided automatically to all eligible employees. The death benefit is usually linked to an annual salary (1-2x) or a flat amount. Employees do not have to pay any premiums.
- Supplemental Group Term LifeโThis optional coverage allows employees to purchase coverage beyond the primary policy limits. They pay the premiums through payroll deductions.
- Dependent Group Term LifeโEmployees can elect this additional coverage to insure dependents’ lives, such as spouses and children.
- AD&D insurance โ Some group policies may include accidental death and dismemberment (AD&D) benefits that pay if an insured dies or suffers significant injuries due to an accident.
Who is Eligible for Group Term Life Insurance?
Employers define the eligibility requirements in the group policy. The criteria specify which employees can qualify for coverage under the group plan.
Employee Eligibility Requirements
Typical eligibility rules may include:
- Being an active, full-time permanent employee
- Completing an initial waiting period (such as 30 or 60 days)
- Working a minimum number of hours per week (e.g. 20 hours)
- Being under the age of 70
Once an employee meets the eligibility criteria, coverage is guaranteed up to the guaranteed issue limits defined in the policy. This allows high-risk individuals who may not qualify for individual life insurance to obtain coverage through their employer’s group plan.
Dependent Eligibility Requirements
If the group policy offers dependent coverage, the employer will define rules for which dependents can be covered. Dependents may include:
- Legal spouse
- Domestic partner (if recognized by state law)
- Dependent children up to age 26 (sometimes extended for full-time students)
- Disabled dependents incapable of self-support
Documentation such as marriage and birth certificates may be required to enroll eligible dependents.
Cost of Group Term Life Insurance in Canada
Group term life insurance offers affordable rates, especially for large employer groups. Insurance companies can offer lower premiums for group coverage because the risk is spread across a diverse pool of insured lives.
Several factors impact the monthly or annual premiums for group term life insurance.
Factors that Determine Premiums
- Age of employees โ Premiums increase as employees age due to rising mortality risk.
- Gender of employees โ Women often have lower premium rates than men of the same age.
- Job classification โ Some employers have different benefit schedules or premium rates based on employee job categories.
- Claims historyโThe group’s Past claims experience affects renewal rates. Higher claims may lead to rate hikes.
- Size of group โ Larger groups can negotiate better rates based on economies of scale. Small groups have less bargaining power.
- Benefit amounts โ More coverage means higher premiums. Employers control costs through lower fundamental limits.
- State mandates โ Requirements to offer coverage or provide certain benefits may increase premiums.
Comparing Rates Between Group and Individual Policies
Group-term life insurance rates are significantly lower than individual policy rates. Here are some reasons why:
- No medical underwriting โ Group coverage is a guaranteed issue in most cases, unlike fully underwritten individual policies.
- Group discounts โ Insurance companies offer discounts for selling coverage to an entire group under one policy.
- Low distribution costs โ Group policies have lower commissions and administrative expenses than individually sold policies.
- Low adverse selection โ The varied health status of the group prevents very high-risk lives from skewing rates.
On average, group term life insurance rates can be lower than comparable individual term life insurance protection. Employees get quality coverage at reduced group rates.
Pros and Cons of Group Term Life Insurance
There are several advantages and disadvantages to group-term life insurance plans.
Advantages of Group Term Life Insurance
- Lower premium rates โ Group term life is cheaper than individual policies. Premiums are based on employee age bands.
- Guaranteed coverage โ Applicants don’t have to prove insurability. Coverage up to policy limits is approved for all eligible enrollees.
- Simple enrollment โ Employers handle the signup process. Medical exams and health questionnaires are not required.
- Flexible payment options โ Premiums can be paid by the employer or shared between the employer and employee.
- Unlike individual life insurance purchases, there are no sales commissions โ Group term life insurance does not involve agents seeking commissions.
Disadvantages of Group Term Life Insurance
- Limited portability โ Coverage ends if an employee leaves the company. The ability to port coverage or convert to individual policies may be restricted.
- Limited customization โ The employer sets the entire group’s benefit amounts, options, and policy features.
- Rate increases โ Group policy rates can rise over time due to factors like higher claims that employees cannot control.
- Limited duration โ Group term life insurance is not permanent. It ends when an employee terminates or retires from the company.
Features and Benefits of Group Term Life Insurance
Group term life insurance policies offer several standard provisions and options employers can select.
Conversion Options
Many group term life insurance plans allow employees who terminate employment or retire to convert their group policy to an individual permanent life insurance policy, such as whole life or universal life.
Employees generally do not need medical exams to exercise this conversion right. However, they will have limited time (typically 31 days) to convert and may need to pay higher premiums for the individual policy.
Portability Options
Portability provisions let employees keep their group term life insurance in force even after leaving. The coverage can be continued by paying premiums directly to the insurance company.
Portability is an alternative option if conversion to permanent insurance is not affordable. Ported group term rates will be higher than active employee rates but still less expensive than buying new coverage.
Waiver of Premium Provision
This feature waives the insured’s premium payments if they become disabled (as defined in the policy) before age 60 or 65. Coverage continues without premiums being paid until the disability ends or retirement age is reached.
Accelerated Death Benefit
This rider allows terminally ill insureds to receive a partial death benefit payout while they are still living. It can help pay medical bills or other expenses related to a terminal condition. The death benefit to beneficiaries is reduced by the amount paid out.
How to Get Group Term Life Insurance
There are a few ways employees can obtain group-term life insurance coverage.
Employer-Provided Coverage
This is the most common way to get group-term life insurance. Employees gain access to affordable life insurance as part of their benefits package. Employers determine eligibility rules, benefit amounts, and premium contributions.
Professional Associations and Affinity Groups
Many alumni organizations, associations, and other large groups offer their members group-term life insurance options. These groups leverage their purchasing power to negotiate policies with preferred pricing.
Direct Purchase Coverage
Some insurance carriers now offer group term life insurance policies that individuals can enroll in online without belonging to an employer or association group. However, rates are higher than traditional group plans.
FAQs about Group Term Life Insurance
Here are answers to some frequently asked questions about group-term life insurance.
Is Group Term Life Insurance Taxable?
Premiums paid by the employer are not taxable income for the employee. Benefits paid to beneficiaries are generally not subject to income tax either. However, group term life insurance coverage over $50,000 provided as an employee benefit must be reported as imputed income on the employee's W-2 form.
What Happens If I Leave My Job?
If an employee leaves or is terminated, the group term life insurance coverage will end. The employee may be allowed to convert to an individual policy or port the group coverage. However, restrictions and deadlines apply. Replacement insurance should be considered before the existing coverage lapses.
Is Group Term Life Enough Coverage?
Group-term life insurance can provide cost-effective coverage but may need to be more. Employees with families should consider purchasing supplemental individual policies. Group and individual life insurance allows customization to each person's unique needs and income replacement goals.
How Does Group Term Life Work with Individual Life Insurance Policies?
Group-term life works well to complement individual insurance. The group plan provides essential protection that gives employees with health conditions access to coverage. Individual policies can supplement the group plan to create sufficient income replacement and meet other financial objectives. Using both types of life insurance allows people to obtain adequate coverage cost-efficiently.
Conclusion
Group term life insurance offers an affordable way for employers to provide valuable life insurance protection to their workforce. Employees gain access to guaranteed coverage without medical underwriting through the convenience of employer-sponsored plans.
While group term life insurance has some disadvantages, like limited portability and customization, it can provide a solid baseline of coverage. The lower rates enable high-risk employees to obtain protection that may be unattainable in the individual life insurance market.
Employees should see group term life insurance as a foundation of coverage that can be supplemented with individual permanent life policies. Group and individual life insurance allows employees to customize their total coverage, manage costs, and meet diverse financial protection goals.
Group term life insurance plays an important role in a comprehensive insurance plan. Employers looking to enhance their benefits packages should consider adding this useful coverage. Employees should take time to understand how group term life works on its own and in conjunction with individual policies to create an optimal plan that provides income replacement and protects loved ones. With guaranteed issue nature and affordability, group term life is a valuable coverage option for many households.
Article Sources
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Group Term Life Insurance – dundaslife.com
Group Life Insurance: How It Works, Types, Pros & Cons – investopedia.com
Group term life insurance policies โ Employer-paid premiums – canada.ca
