Finding quality life insurance to best protect your beneficiaries is a serious task. You need to decide what the best policy is for your needs and your budget, but also what type of coverage, which insurer and which benefits best align with your goals. Even if your employer or an organization you're affiliated with offers group life insurance, you may need to explore additional coverage.
However, before you begin that journey, you'll want to understand how group life insurance plans work and what their benefits are. That knowledge will help you decide whether you need an independent individual policy to supplement a group life insurance plan, and if so, what that coverage should look like.
To better understand group life insurance, read on for our comprehensive guide.
What is group life insurance?
If you’re looking into life insurance for beginners, chances are you’ll come across group life insurance as one of many options. This is a type of plan offered by an employer or large-scale group, such as an association or labor organization, to its workers or members. You may have already encountered it as an employer-sponsored life insurance plan. Some fraternal or volunteer organizations may also purchase a group life insurance policy for its members, and active duty and some former military members in the United States have Veterans Group Life Insurance.
Whether group life insurance is being offered to employees or any other affiliated group of individuals, the options share some key traits. Group life insurance policies are generally written as a single contract held by a central entity with set benefits and payouts for everyone covered, generally no medical exam is required and these plans offer greater affordability compared to other types of life insurance.
How does group life insurance work?
The answer to this question isn't straightforward. Various types of group life insurance may have different eligibility requirements, and you need to understand the right questions to ask to ensure you get the most out of your policy. However, the following section provides some details about group life.
Setting up group life insurance
Group life insurance is set up either as employer-paid group life insurance or as a benefit for membership in an organization. Enrolling in these types of plans often involves little more than signing a form since group life insurance requirements are far less stringent than individual life insurance policies procured independently of employer or organizational group plans.
The company or organization offering the plan owns the group life insurance policy, and as the policyholders, they are tasked with choosing which group life insurance companies to use. In some circumstances, they may even designate a single death benefit amount for all employees or members who are enrolled in the plan.
In most cases, if you decide to enroll in a group life insurance plan, you'll still have some options. For instance, you'll be able to designate life insurance beneficiaries and decide what percentage of the death benefit each beneficiary receives. You may also be offered several tiers of coverage to choose from. However, this is typically only true if you are also paying some portion of the premium.
As the policyholder, the group (e.g., employer or organization) often pays at least some portion of the premiums for this type of life insurance. If your employer or organization offers tiers of coverage, they will typically have an initial tier for which you pay nothing. They will then require you to pay for added coverage beyond the basic group life insurance coverage offered.
You'll usually be responsible for paying for the additional coverage either through a payroll deduction if the plan is offered through your employer, or through an increase to your organizational dues if the plan is offered via membership. Alternatively, some companies and organizations may require you to pay for the added coverage directly, but you'll still typically make the payment to the organization rather than the insurer itself.
One exception to this occurs when the organization or company permits former members or employees to maintain life insurance benefits and coverage. In those instances, if you depart under good terms, you may have the option of maintaining your life insurance coverage for a set period or indefinitely depending on the policy’s terms. If you choose to maintain your group life insurance benefits, you will take over responsibility for paying the premiums directly to the insurer.
Coverages for group policies
Typically, the coverage for employer group life insurance ranges from $10,000 to $50,000, but it can also include multiples of your salary. For example, if you make $60,000 per year, the policy could offer 1x or 2x your pay, equating to $60,000 and $120,000, respectively.
Ultimately, organizations choose how much coverage to offer. They may adjust that amount based on factors such as average employee earnings to ensure the coverage matches their costs of living. The purchaser may also choose lower coverage limits if a significant number of those covered are older or otherwise considered high-risk, as such factors will raise premiums.
Beyond the death benefit, some organizations may also offer coverage for accidents that leave someone permanently disabled. This type of additional coverage typically only entails extreme cases, such as blindness, paralysis or loss of a limb.
Termination of group life insurance coverage
Group life insurance usually terminates when your affiliation with the purchaser — be it an employer or organization — ends or changes significantly. This can happen when you leave a job, transition to a part-time position or end your membership with an organization. As previously mentioned, some organizations will offer former employees and members the option of taking over premium payments in order to retain their group coverage. You may also be permitted to convert the policy into an individual one.
However, because many organizations are covered under group term life insurance, you may not be able to carry the plan past a certain date as set forth by the policy’s term. Group term life insurance covers a specified period of time. Once that term expires, your coverage ends and the organization must take out a new policy.
If you weren’t able to convert the group policy to an individual policy, your former organization may not permit you to maintain coverage when it renews its term life insurance policy. On separation, some organizations also set a limit on how long you can maintain coverage.
Claims process for death benefits
The claims process for a group life insurance policy is essentially the same as with any other type of life insurance policy. Beneficiaries do not deal with the organization that holds the policy, though some organizations may choose to offer assistance. Instead, your beneficiaries will deal directly with the insurer to gain access to the death benefit.
The first step will be to verify and validate eligibility. Beneficiaries will need to provide proof that you died, which is generally a death certificate. They will also need to furnish the insurer with proof of their own identity. Once beneficiaries submit a claim, the insurer verifies the information and the policy, ensuring the latter is still in effect.
It's essential that you regularly review life insurance policies, both to confirm they’re current and to ensure beneficiary information is accurate. Some of the most common problems related to life insurance claims stem from failures to update beneficiary information after events like divorce or death.
What is group universal life insurance?
While most organizations choose group term life insurance, it's not the only option. Group universal life insurance offers additional benefits. Group universal life insurance has the same characteristics of other group life insurance policies; however, it doesn’t expire and accumulates a cash value. This accumulated cash value is one of the biggest differences you’ll see when comparing term vs. whole life insurance.
The cash value isn’t just based on the premiums you pay, either, but also grows based on the investments made with that cash value. This is an advantage over group whole life insurance, which has a set cash value accumulation that isn’t investable. The disadvantage compared to group whole life insurance is that group universal life insurance cash values are, to some degree, dependent on market conditions given that they rely on investments to grow.
As with other forms of permanent life insurance, you can access the cash value of a group universal life insurance policy while you’re still alive. Your options for doing this will vary from policy to policy. You may be able to borrow against the cash value or make withdrawals against it that lower the death benefit. The cash value can also serve as a form of tax-deferred savings if you access it later in life.
One of the greatest benefits of a group universal life insurance policy is its portability. These policies typically permit the covered individual to maintain the insurance even after they leave the organization holding the policy. In these cases, you don't have to worry about the money you pay into the policy via premiums being lost if your employment status changes or if you leave an organization.
Group life insurance vs. individual life insurance
When comparing group and individual life insurance plans, the choice ultimately depends on your personal requirements and goals. However, one of the most important considerations is how well the benefits of the two types of policies complement one another. That’s because even if you have group life insurance coverage, you can still secure an individual policy.
Your group life insurance policy may not offer enough coverage to sufficiently provide for your beneficiaries, and/or you may have a policy you cannot convert to an individual policy or that is not portable if you depart an organization. In all of those cases, it's wise to have an individual life insurance policy to ensure your needs will be met.
At the same time, don’t automatically decline group life insurance because you already have an individual policy. Beyond the additional death benefit, the benefits of a group life insurance plan may include coverage your individual policy doesn’t, such as accidental death and dismemberment. Your group policy will also offer coverage at a better rate than anything you can get individually.
The advantages of group life insurance
Group life insurance offers advantages for both individuals and organizations. For instance, group life insurance can be a particularly powerful recruiting and retention tool for businesses. Whether you’re an employer competing for the best employees or an individual wanting coverage without the hassle or procuring it yourself, you’ll want to understand how those advantages work. The following section details the benefits of group life insurance.
Cost-effectiveness for employees and employers
Even if an employee is responsible for paying the entire premium for a group life insurance policy, they can expect to pay less than if they took out an individual policy with similar coverage. However, employees are not the only ones who benefit financially. Employers can realize tax benefits by offering group life insurance, and they’re also able to use group life insurance plans to support recruiting and retaining talent.
No medical underwriting
Another considerable advantage of group insurance plans is that they don’t require a life insurance medical exam, which considerably simplifies the enrollment process. It’s also beneficial to individuals who, due to age or past illness, may have difficulty finding a good rate for an individual life insurance policy. Since the insurer’s risk is based on the size of the group, individual medical history and conditions do not factor in determining cost.
Simplified enrollment process
Because group life insurance doesn’t consider any individual factors, the normal enrollment work for a life insurance policy is taken care of by the employer or organization. In order to enroll in the plan, members or employees have to choose or decline any optional added coverage, agree to pay a portion of the premium if required and designate their beneficiaries. In many cases, the entire enrollment is simply a short form completed along with other onboarding documents when an individual joins a company or organization.
Additional coverage options and life insurance riders
Many groups choose to offer additional benefits under their group life insurance policy. For example, a group life plan that provides the aforementioned accidental death and dismemberment coverage will pay out for an accidental death that an independently acquired life insurance policy might not cover. It will also cover extreme injuries such as blindness and paralysis.
Some organizations may also offer benefits such as coverage for your spouse and dependents or a waiver for premium payments if you become disabled. Finally, even if your organization doesn't offer portability or a conversion option as part of its basic coverage, you may be able to pay for a rider that gives you these options.
Group life insurance FAQs
Is group life insurance taxable?
Can I cash out my group life insurance policy?
Whether or not you can cash out your group life insurance policy depends on the type of plan offered by the group and any rules set forth by the insurer. However, if the policy is for group term life insurance, you won't be able to cash it out as term life plans don't offer a cash component and only offer a death benefit.
If the group life insurance plan is a permanent policy, such as universal or whole life, there are potential downsides to cashing it out, if you're allowed to in the first place. Taking the current cash value will result in fees owed to the insurer and subsequent tax liabilities.
To learn more about your eligibility to cash out a group life insurance plan, contact your insurer to find out whether it's possible, what the consequences are and what your policy's cash value currently is.
Who normally pays the premiums for group credit life insurance?
Group credit life insurance is an entirely different category of group life insurance. These policies are issued to banks or other lenders and cover the repayment of debt if a borrower dies or becomes permanently disabled. With these types of plans, the financial institution is both the policyholder and the beneficiary.If you take out a major loan, such as a mortgage, line of credit or student loan, the lender may offer you such an optional policy. In those cases, the borrower will be responsible for the policy's premium payments, which are typically bundled with the principal of the loan and part of your monthly payments. Even though the lender is the beneficiary, the policy also protects the borrower's family or business partner(s) from the financial burdens of unpaid debt.
Summary of Money's what is group life insurance
While it might not be the best life insurance for everyone, group life insurance is a significant benefit for employers, employees and members of organizations that offer it. This type of life insurance is usually more affordable than individual policies and doesn't require medical exams or individual underwriting.
However, while it does offer significant advantages compared to individual policies, such as cost-effectiveness, simplified enrollment and additional coverage options, it may not always provide comprehensive protection based on individual needs. It's important to understand how your specific group life insurance plan works and what it covers before deciding whether or not you should enroll in it, or if doing so will require you to obtain supplemental coverage.