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Group term life insurance: Is it enough?

Fact-checked with HomeInsurance.com

Planning for the future is hard when nothing is certain, as 2020 has proven true in a very real way. But planning for the financial welfare of your loved ones is different, as it’s based on a few key certainties. The best way to plan for life after your death is to obtain a life insurance policy that will pay out a death benefit to your selected beneficiaries. This will help them pay for end-of-life expenses, costs of living, outstanding debts you leave behind and other financial obligations they may incur as a result of your passing. 

Many employers offer group term life insurance plans as a benefit, to help employees plan for such life events. Whether or not group life insurance plans are enough to satisfy your individual needs largely depends on your specific circumstance. For some, these plans may be all that’s needed to provide for your beneficiaries. Others may need to search elsewhere for more robust coverages, or supplemental policies, that may not be available through their employer-sponsored group term life insurance policies.

What is group term life insurance?

Before you can determine whether or not group term life insurance is right for you, you first need to know exactly what these policies are. A group life insurance policy is a type of life insurance that provides coverage to an entire group of people under one contract. In most cases, these policies are owned by an employer or entity, and the policy provides coverage to their employees.

Usually, these policies are offered as part of the employee benefits package, allowing employees to plan ahead for their future at a lower rate than it would cost them to seek individual coverage elsewhere. In fact, most companies select term life insurance policies because it is more cost-effective for both the company and its employees. These policies are provided in annual renewable increments, and the employer usually pays for most (if not all) of the premiums. 

Group term life insurance policies remain in effect until you are either terminated from your position, or when your coverage term ends. In the event you leave your employer, you may be able to convert your group term life insurance policy to an individual policy, but this will likely result in an increase to your premium.

How group term life insurance works

According to the Society for Human Resource Management, 85% of employers offer group life insurance benefits to their employees that meet specific eligibility requirements. The plans are written under one contract, typically owned by the employer or corporation, and are designed to cover an entire group of people. This is why most employers include such policies as part of their benefits package.

Employees must meet eligibility requirements prior to enrolling in their company’s group term life insurance plan in order to qualify for coverage. Once they meet the requirements, they may enroll and designate beneficiaries. Afterwards, they will receive a certificate of insurance to signify their proof of coverage. 

Because employers pre-select the coverages to offer employees, the opportunity for customization is typically slim. You may only select the options that have been predetermined by your employer when choosing a policy. For example, an employer may only offer a five- or ten-year term life insurance option to their employees. Anyone requiring coverage for a longer period of time would need to look elsewhere for an individual plan.

What amount of income is insured?

The amount of income that’s insured largely depends on your specific employer and the plans they have selected for the employees. It is also based on your particular position within the organization. In most cases, benefits for management and C-suite executives are greater than those offered to entry-level or hourly employees. Group life insurance policies usually only cover an employee’s base salary. However, there are employers that offer coverage that multiplies the employee’s base salary by a set increment, allowing for more robust coverage.

Who needs group term life insurance

Among those who benefit the most from group term life insurance plans are young people, single people, those with compromised health and married couples in which the covered spouse does not supply the main source of their household’s income. These groups of people tend to benefit the most for the following reasons:

  • Young: these employees may know the importance of having a life insurance policy, but may not have had the chance to shop around for their own plans. By obtaining coverage through work, they’re able to take advantage of enhanced protection in a cost-effective, time-sensitive manner.
  • Single: because group life insurance coverage provides a lower death benefit than individual plans, single people often benefit the most. Without a spouse or dependents, their ability to obtain coverage that suits their needs is simplified by taking advantage of their company’s benefits package.
  • Compromised health: those with serious medical conditions may have a difficult time finding a life insurance policy since many carriers issue denials for pre-existing conditions. For those who have serious medical conditions, a group life insurance policy can significantly reduce the rate they would pay for an individual plan.
  • Married: group term life insurance plans can offer married couples additional security — especially if the covered spouse is not the sole breadwinner for the household. These plans won’t suffice on their own for a growing family, but they offer a great way for couples to strengthen their protection in the event something happens to the policyholder.

Pros and cons of group term life insurance

When it comes to group term life insurance, the advantages for these policies can be broken down into three simple categories: convenience, price and qualifying for coverage. 

Convenience

Obtaining group life insurance policy is as easy as getting hired by a company that offers the plan and meeting their eligibility requirements. It’s a simple way to protect your family without having to research endlessly for the right provider or an affordable premium. 

Affordability

In fact, most employers pay for most or all of their employees’ life insurance premiums under these policies, making it a cost-effective solution for those seeking coverage. 

Qualifying

Additionally, group life insurance plans are offered to employees without the need for a medical exam, making it much easier for those with serious medical conditions to obtain coverage at a lower price than if they had searched for a policy on their own.

As with anything in life, there are a few drawbacks to group term life insurance plans. Most group term life insurance plans are very basic in nature, covering only the employee’s salary and nothing more. That means bonuses, commission, overtime and other financial gains may not be covered, leaving your beneficiaries limited in the compensation for financial resources they may have relied on. 

Term life insurance policies generally cover what’s best for most people, so if you need more robust or customized coverage, a group policy may not be the best option. However, it may still be in your best interest to take advantage of the policy offered through the workplace so you have additional coverage — especially if your employer pays for the premium in full.

Requirements for group term life insurance

Requirements for qualifying for coverage vary by company, but they usually stipulate a consecutive period of continuous employment, or working a certain number of hours per week. For instance, an employee may only be eligible to enroll in their company’s life insurance plan once they have worked 90 days for 8 hours each day. 

Depending on the type of group term life insurance plan, additional requirements may apply. If the employer offers a supplemental group term life insurance policy, you may only be eligible once you have experienced a qualifying life event, such as getting married, divorced or having children.

Is group life insurance through work enough?

The short answer — it depends. If you’re young, single, compromised in health (and unable to qualify for other coverage) or not the sole breadwinner for your household, group life insurance through your employer can be an excellent option that provides just the right amount of coverage. 

It also depends on the specific plan, carrier and scope of coverage outlined in your employer’s benefits package, as well as your position within the company. If you’re a senior-level employee eligible for better benefits, or your employer has a particularly generous plan, it may be enough to fit your financial needs. It’s best to consult with a financial advisor to determine the best solution for your particular situation.

Alternatives to group term life insurance

Life insurance isn’t only available through employers; there are many alternatives to group term life insurance that individuals may take advantage of, simply by seeking out their own policy. Such alternatives include:

  • Universal Life Insurance
  • Term Life Insurance
  • Whole Life Insurance
  • Variable Life Insurance
  • Simplified Issue Life Insurance
  • Guaranteed Issue Life Insurance

Is group term life insurance taxable?

According to the United States Internal Revenue Service (IRS) IRC section 79, an exclusion is applied for the first $50,000 of group term life insurance coverage offered by an employer. Additionally, there are no tax consequences if the total coverage amount does not equate to more than $50,000. If the employer also offers coverage for spouses and dependents, the amount covered may not be taxable to the employee if the amount does not equate to more than $2,000.

The takeaway

  • Group life insurance policies are plans that are written under one contract, generally owned by an employer, and provide coverage to a group of employees.
  • Plans are usually basic in nature and provide a convenient, cost-effective solution for young people, single people, those with compromised health and married people who are not the sole earners of their household.
  • Employees may enroll in their company’s group life insurance plan after they meet certain requirements that are outlined by their employer and the insurance plan itself.
  • While group life insurance plans can provide some people with enough coverage, they are limited in their offerings and may not be the best solution for those who need more robust coverages.
  • Alternatives to group life insurance are typically more expensive, but are more customizable and capable of providing the breadth of coverage that bigger families need.

Obtaining a group term life insurance plan from an employer is a great way to save money on your life insurance coverage needs. Cost-effective and convenient, these plans are especially great for those who are young, single, poor in health or not the household’s main source of income as they usually offer basic coverage. 

While group life insurance plans can provide a great solution for those who do not require much coverage, growing families may require more robust financial security that only individual plans can provide. Be sure to shop around and speak with a financial advisor to make the right decision for your financial future.

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