Understanding Group Term Life Insurance: Benefits, Costs, and Key Considerations

What Is Group Term Life Insurance?

Group term life insurance is a temporary insurance policy offered primarily through employers and associations. It typically includes a base amount of coverage at no cost to employees. There is an option to acquire additional coverage for themselves, their spouses, and children.

While convenient and typically inexpensive, there are eligibility requirements, such as working a certain number of hours or being employed for a certain amount of time. Even though some employers allow portability of coverage, it typically ends with employment. This may result in a potential need for supplemental individual life insurance. It's important to compare group coverage with individual policies to ensure adequate financial protection.

Understanding the Mechanics of Group Term Life Insurance

According to the U.S. Bureau of Labor Statistics, 57% of private employees and 83% of government employees have access to life insurance at work. Group life insurance policies are usually term insurance given to permanent employees who have been with the company for at least 30 days.

Group term life insurance coverage can be adjusted for qualifying life events or during an open enrollment period.

The standard amount of coverage is usually tied to the covered employee's annual salary, with premiums primarily based on the insured's age. Employers usually cover most or all premiums for basic coverage. Additional amounts, ordinarily in multiples of the employee's annual salary, may be offered for an extra premium paid by the employee. 

As with other types of life insurance, group term pays out a death benefit to the beneficiary you choose if you pass away while the policy remains in effect. Insured members usually get certificates of insurance as proof of coverage.

Exploring the Pros and Cons of Group Term Life Insurance

Group term coverage is generally inexpensive, especially for younger people. Participants are not normally required to go through an underwriting process, as all eligible employees are automatically covered. However, unlike individual term insurance plans, which typically lock in a rate for 20 to 30 years, most group plans 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 provided by the employer.

Although affordable, group life insurance coverage might not be enough for many families. Employers or associations often limit coverage based on tenure, salary, dependents, and employment status. Participants can't tailor group term coverage like they can with individual policies.

Lastly, group term coverage usually ends when you leave your job. Some employers let former employees keep the same coverage, called porting. Former employees could also possibly convert 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 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.

Eligibility Criteria for Group Term Life Insurance

Typically, all employees are automatically enrolled in the base coverage once they meet the eligibility requirements. Those requirements vary by plan and employer. They can include working a certain number of hours per week or being an employee for a certain period of time. Group term life sold by associations (such as fraternal organizations, trade groups, and charitable groups) includes other requirements, such as maintaining membership in the organization.

The availability of supplemental group term coverage also differs among employers. They may offer extra coverage for the employee beyond the base insurance, as well as optional insurance for a spouse and/or children. In some plans, individuals can only enroll for supplemental insurance when they are initially employed or upon a qualifying life event, 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 applicant answers some questions to determine eligibility rather than undergoing a physical exam. The carrier then decides whether or not it will offer the additional coverage. 

Key Considerations for Group Term Life Insurance

Employers are allowed to provide employees with $50,000 of tax-free group term life insurance coverage as a benefit. 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.

It's worth comparing your employer's offering with what you could get buying your own individual policy to ensure you'll be receiving the best term life insurance policy possible. It is also important to revisit the coverage you selected during open enrollment each year to make sure the plan still fits your needs.

The Bottom Line

Group term life insurance is an affordable and accessible option for many employees. However, it should be noted that this type of coverage is temporary, dependent on eligibility requirements, and there is the possibility of insufficient coverage for family needs. It's important to assess financial and insurance needs annually, especially during open enrollment, to ensure adequate coverage.

There is an option to supplement group life insurance with an individual policy to enhance financial protection. There are portability limitations associated with employer-sponsored group term life insurance. Employers may offer supplemental insurance options that might be more suitable for certain specific needs.