You just got hired and your company is offering you group term life insurance.
That sounds good. But what is it? How does it work? And are there any traps that money expert Clark Howard wants to make sure you don’t fall into?
Table of Contents
- What Is Group Term Life Insurance?
- How Does Group Term Life Insurance Work?
- Advantages of Group Life Insurance
- Disadvantages of Group Life Insurance
What Is Group Term Life Insurance?
Group term life insurance is a contract that covers multiple people.
Companies often offer group term life insurance to employees as a benefit, although unions and other entities can partake as well.
Many companies offer a base coverage amount of group term life insurance at no cost. Employees often get the option to purchase additional coverage as supplemental insurance.
Because it’s free or less expensive than buying term life insurance as an individual, the participation rate for group term life insurance tends to be high.
It’s possible — and even advisable — to look into the best term life insurance companies on your own, even if a company offers you group insurance coverage.
How Does Group Term Life Insurance Work?
Corporations typically don’t offer group term life insurance to just anyone.
There are some rules around who is and isn’t eligible. It’s common for employers to reserve group term life insurance for full-time employees and/or to require at least some degree of tenure at the company before you’re eligible.
Sometimes companies base their offer on whether you have dependents (spouse, children) or tier their offer depending on your status (executive, mid-level management, hourly employee).
Your annual salary tends to be the standard coverage amount that your employee will offer you — often for free. And you may be able to buy multiples of your salary as additional coverage.
Sometimes a company will automatically enroll you in its group term life insurance policy when you get hired.
Companies hold open enrollment periods for any adjustments to your policy in terms of dependents or benefit size. You’ll also want to make sure that you fill out a beneficiary form that legally designates where the money will go if you die while you’re covered by the company’s policy.
When you leave your job, you may be able to convert your group life insurance policy to an individual term life insurance policy, but that will cost you.
“If your employer gives you free life insurance, take it,” Clark says. “But never count on employer-provided life insurance. And never buy additional coverage from your employer unless your health prevents you from qualifying for your own policy.”
Tax Rules Around Group Life Insurance
According to the Internal Revenue Service, companies are allowed to provide their workers with up to $50,000 in group term life insurance tax-free. Anything more than $50,000 is a taxable benefit and will show up on your W-2.
There are exceptions for owners and certain executives, who may have to consider group term life insurance coverage of $50,000 or less to be a taxable benefit.
Advantages of Group Life Insurance
Here are some of the biggest benefits of group term life insurance:
- Free or inexpensive life insurance. Businesses offer group term life insurance for free — or at least for much less than the market rate.
- Convenient. Some employers enroll you automatically. At a minimum, a Human Resources representative should be able to fill you in on the process. It’s much simpler and faster than hunting down your own term life insurance policy (although you should consider that as well).
- Often doesn’t involve a medical exam or questionnaire. You can skip the underwriting process, which is even more convenient.
- Can be helpful to those who are older or not in great health. The older you are, and the worse your health status is, the more expensive it is to secure term life insurance on your own. Group insurance allows you to get some amount of coverage at an affordable rate (or for free).
Disadvantages of Group Life Insurance
Here are some of the biggest
- Coverage is often contingent on employment. This is an employee benefit just like health insurance, a 401(k) contribution match or an end-of-year bonus. When you leave your job, you typically lose your coverage. Worse, if you still need life insurance and have to buy it yourself, you may end up paying higher premiums than you would have if you’d bought it when you first got hired.
- Companies can limit your coverage by specific criteria. You may need to achieve a certain amount of tenure, earn full-time employee status or clear some other company-appointed bar in order to become eligible for coverage.
- Your benefit may be insufficient. Remember, life insurance exists as an income replacement. If you’re trying to replace your income for a spouse and/or children, one year of your annual salary probably won’t cut it.
- Rates are not locked in. With level term life insurance, you pay the same monthly premium, often for 20-30 years. That’s not the case here. Often, group insurance includes rates that go up in increments when you reach certain ages.
- Read the fine print. Your policy may cover only accidental death and dismemberment. Make sure you read the terms and conditions before you and your family rely on group life insurance.
Final Thoughts
Group term life insurance is a nice workplace perk that, hopefully, you never have to use.
However, your benefit generally matches your annual salary. That’s not enough coverage if you’re counting on life insurance to replace your income. So you still need to look at buying level-term life insurance.
