Group life insurance is a type of life insurance policy that covers an affiliated group of individuals, typically the employees of a company or the members of an organization, who can be covered under a single master contract. Group life insurance offers valuable benefits for both the administrators of the group and the members of the group.
What is group life insurance?
The primary benefit of group life insurance is that the combined cost makes it possible to essentially obtain a group discount, making coverage for each member more affordable than it would be with individual life insurance policies.
This group purchase enables premium savings and other advantages for the group (whether a company, a professional association or a trade union) and for everyone in the group as an individual insured member.
Who can buy group life insurance?
In most states, a group can qualify to purchase group life insurance if it is legally considered a natural group, a group that was not formed solely for the purpose of buying insurance.
One familiar example is the American Association of Retired Persons. All AARP members are at or near retirement age, so they have many financial and other goals in common. AARP offers members both term life insurance and permanent (also known as whole) life insurance.
Group life insurance can be made available to members of a fraternal organization, an alumni association or a trade group. Group life insurance may also be available in a lending relationship, between the creditor and borrowers.
A group must usually have at least 50 members to qualify for group life insurance, so in some cases, small businesses will join together to buy group life insurance in a multi-employer group.
Group Term Life Insurance as a Member Benefit
Group term life insurance is often made available at no cost to the members of the group as one part of their benefit package. Group life policies usually do not require a medical exam or medical underwriting (more about that later), although members may have to wait for coverage during a probationary period.
While group life insurance death benefits are usually limited, they often provide the first life insurance coverage and the foundation of financial security for many workers and their families.
Benefits for Employer (or Group) and Employees (or Group Members)
Here is quick summary of the typical benefits of group life insurance for both the employer (or group) and the employees (or group members):
Benefits of Group Life Insurance for the Employer (or Group):
- Attract and Retain Employees (or Members)
- Tax Advantages
- Efficient Benefits Administration
- Cost Effective Coverage
Benefits of Group Life Insurance for the Employees (or Members):
- Access to Financial Protection
- No Medical Underwriting
- Convenient Enrollment
- Flexible and Portable Coverage
In this article, we’ll take a closer look at each one of these benefits and how they make group life insurance an excellent value for employers and employees. First, we’ll examine the benefits for the employer, association, union or other group offering group life insurance.
Attract and Retain Employees (or Members)
In the current economy, unemployment is very low and competition for the best people can be fierce. Group life insurance is an attractive employee benefit that can help employers attract and retain top talent. Group life insurance as an employee benefit demonstrates the company’s commitment to the well-being of its employees and can be a valuable addition to the overall compensation package.
For an association, fraternal organization, union or trade group, the ability to offer an affordable group life insurance policy is a valuable perquisite of membership that can help retain existing members and attract new members as one of many incentives to join.
Premiums paid by an employer for employee group life insurance are tax-deductible. This reduces the financial burden on the employer while providing a valuable benefit for employees.
However, premiums for group life insurance are only deductible as an employee benefit. This means that the business owner or the company itself may not be a beneficiary of the life insurance policy. Likewise, the premiums paid for an employee who is the spouse or child of the owner are not deductible.
In addition, premiums paid for employee group life insurance are eligible for deduction only up to $50,000 in coverage. Above this amount, the IRS considers premiums for additional coverage to be employee wages, which may not be deducted as insurance expense, and which may have payroll tax consequences for both the employer and employee.
Efficient Benefits Administration
Group life insurance policies streamline the administrative process for employers. They eliminate the need to monitor and manage individual policies for each employee, as the coverage is provided under a single master contract. This reduces administrative costs and paperwork, making it easier for employers to sponsor and manage the insurance program.
Group life insurance policies generally do not require individual medical questionnaires, examinations or other medical underwriting, further streamlining the process.
Enrollment is Easy
The insurance company will provide the necessary information resources and forms for enrollment, which is retained in the employee file. Each employee or member must designate a beneficiary for the death benefit. In some cases, more than one person can be named, or the death benefit can be divided on a percentage basis.
One of the few employer responsibilities for monitoring group member coverage is to periodically remind employees to update their group life insurance policy or beneficiary to reflect any important life changes, such as a marriage, divorce or the birth of a child.
Finally, if employees resign or are terminated, it may be possible to continue their coverage with the insurer, although they will not receive the group discount, and they may be required to meet different underwriting standards for insurability.
Cost Effective Coverage
Group life insurance provides the employer with an opportunity to buy wholesale. It is also an opportunity for the insurer to enroll 50 or more insured individuals under one contract, so the bulk purchase of coverage is more cost-effective for both the employer and the insurance company.
Accordingly, group life insurance policies provide coverage at a lower cost per employee compared to an individual life insurance policy. The premium rates are based on the collective risk of the group, making it more affordable for employers to offer life insurance benefits to their employees.
What does a group life insurance plan cost?
Here’s an example of what the premium cost for group life insurance might be for an employer or group:
- Premium for each $1,000 unit of group life insurance coverage = $0.20 per month
- Maximum death benefit for one employee = $50,000
- 50 units X $0.20 = $10.00 per month for one employee
If the insurance company charges a premium of $0.20 per $1,000 unit of group life insurance coverage, and the policy provided for the employee has a death benefit of $50,000, then the monthly premium would be 50 units times $0.20, or $10. At this rate, an employer could provide 50 employees with $50,000 of life insurance for only $500 a month – a very cost-effective employee benefit.
Next, we’ll examine the benefits for employees of a company or members of an insured group:
Access to Financial Protection
Group life insurance provides employees with support for their families in the event of their death. The policy pays out a death benefit to the employee’s designated beneficiaries, which can help cover final medical expenses, outstanding debts and mortgage payments, providing dependents with a measure of financial protection as they recover from the loss.
For many employees, group life insurance is the first important step they have taken to meet the many challenges of being a head of household, responsible for the comfort and security of their loved ones. Life insurance provides a worker with a powerful way to show the family love and protection that is here today, and will still be here should a tragedy take them away.
The fact that this protection is provided by the group at no cost to the employee makes the benefits of membership all the more valuable.
No Medical Underwriting
Medical underwriting is a process by which an insurance company may determine whether to offer a group life insurance policy to a particular individual, at what premium price and with what exclusions or limits.
A full medical underwriting often requires the applicant to let the insurance company evaluate detailed medical information, including a questionnaire to provide a complete medical history and disclose any pre-existing health conditions. A complete medical underwriting might also include seeking medical records from past health care providers.
Group life insurance typically does not require individual employees to undergo medical underwriting or provide detailed health information. This means that employees with pre-existing medical conditions or higher health risks may still be eligible for group life insurance coverage. It offers a convenient way for employees to obtain life insurance without the need for extensive medical examinations.
Enrolling in group life insurance coverage through an employer or an association can be very simple and convenient. In many cases, the enrollment paperwork is part of the onboarding process when an employee is hired, with human resources on hand to answer any questions.
By enrolling through the employer or other group, a life insurance applicant does not have to deal with insurance agents or compare different plans for value, or really shop at all.
The group plan is already a good value (especially if it is provided at no cost by the group!) and the plan is likely the best choice for members of the group. In many cases, the group plan can also be supplemented with various extensions, with options for taking the plan along if there is a job change.
Flexibility and Portability
Although most group life insurance plans are based on group term life insurance, some plans also offer permanent life insurance (also known as whole life insurance), as well as other supplemental life insurance options. Life insurance policies, such as group universal life insurance, can include cash value, which grows on a tax-deferred basis, meaning the employee does not have to pay taxes on the growth until funds are withdrawn.
Unlike a 401(k) or IRA account, there may be no restrictions on how the employee or group member can access the cash value of a group life insurance policy. It can often be used for any purpose with no early withdrawal penalty. In many states, the cash value in a group universal life insurance policy is protected from creditors, providing an extra measure of financial protection.
Some group term life insurance and group permanent life insurance policies offer portability, allowing employees to continue coverage even if they leave the company. This feature provides employees with the flexibility to maintain their life insurance protection, regardless of job changes or career transitions. However, portability may come at a cost, as the premiums for an individual life insurance policy are likely to be higher than as a member of a group.
Financial Resources to Recover and Carry On
Group life insurance benefits employers or groups by offering cost-effective coverage, helping attract and retain talent, providing tax advantages and simplifying administration. For employees or group members, it provides financial protection, eliminates the need for medical underwriting, offers a convenient enrollment process and may offer portability options.
Beyond these practical benefits, group life insurance provides both employers and employees with the security of knowing that, should something happen to a policyholder, the family will have the financial resources to recover and carry on. Group life insurance represents a win-win-win for employers, their employees and the loved ones who depend on them.