Table of Contents
When you started your job, you were probably offered the chance to get life insurance coverage for little or no cost as a part of your employer's benefits package. This is relatively common as nearly three-quarters of full-time employees have access to group life insurance through work.1
Term or universal group insurance is often an easy way to get basic coverage. Although most employees participate in some form of group coverage, you'll still want to do your homework to determine if this type of life insurance policy meets all your needs. Here's what to know.
- Group life insurance is a policy that covers a pool of people, and there is no need for medical exams or questionnaires.
- Most group coverage policies provide a death benefit of one to two times the base salary.
- Group life insurance is generally provided in two types of policies, group term life insurance and group universal life insurance. The former covers a specific period, while the latter is a type of permanent life insurance.
- The advantages of group life insurance include financial protection for loved ones after the policyholder's death, cost-effectiveness and ease of purchase.
What Is Group Coverage?
Generally, when large organizations — such as businesses, unions, alumni associations and other memberships — buy life insurance coverage, they can get a better deal because they have a large group of potential participants. That helps keep their costs relatively low, and these organizations can pass the savings on to participating members and employees. Depending on your employment or membership situation, you may be able to get basic life insurance coverage for free or a small premium out of your paycheck.
In most cases, you don't need to submit to medical exams or fill out extensive questionnaires with group coverage. That's because the underwriting is for the pool of people, not each individual. It's why coverage is generally more affordable than buying the benefits on your own. However, coverage is often more limited with smaller death benefits, so consider whether it's enough for your circumstances.
How Does Group Life Insurance Work?
Group coverage works like any other life insurance policy — you choose your policy terms, your death benefit and your beneficiary. Then you pay your premium for the duration of the term. When you die, as long as your coverage is still in effect and your premiums are up to date, your death benefit will go to your beneficiary. They can use those funds to help replace your income, pay down your outstanding debt, pay for your funeral services or cover household expenses such as your mortgage payment.
In most cases, with group coverage, you'll get a death benefit equal to one to two times your base salary for free, or at a very low premium cost per pay period. For example, if you make $50,000 a year, you may have the option for a death benefit between $50,000 and $100,000. Additionally, some employers may allow you to increase your policy's death benefit while others may set a cap limit, such as up to five times your base salary. Any premiums you need to pay for additional coverage comes from your paycheck.
Depending on your employer, coverage may be delayed. Some employers have a waiting period, usually between 30 and 90 days, before benefits kick in. Changes can be made during open enrollment periods.
Common Types of Group Policies
Group coverage provided through employers generally come in two options: term and universal.
Group Term Life Insurance
In most cases, if you get coverage through work, it's group term life insurance. Term coverage means that your policy covers you for a specific period, such as 10, 20 or 30 years. Your coverage stops when the policy period ends. You'd need to purchase a new policy to continue having coverage.
In the case of group term coverage at work, the policy is typically in effect for as long as your employer keeps providing it. You can generally purchase coverage equal to your base salary, up to a specified limit. In many cases, your coverage will be between one and two times your base salary. However, in some cases, there may be planned increases in the premiums every five to 10 years since the cost of life insurance typically increases with age.
Additionally, in most cases, your policy does not follow you if you leave your employer. So if you quit or get laid off, your life insurance coverage will not continue, potentially exposing you if something happens between jobs.
Group Universal Life Insurance
Some organizations offer group universal life insurance as a benefit to attract employees, though it's not as common. These policies usually have limited options compared with buying coverage outside of work. However, a universal policy is a type of permanent life insurance. So, it lasts your entire life as long as you pay your premiums. Accordingly, this typically means premiums are more expensive than they are for term insurance.
As with other policies, group universal life insurance pays a death benefit for the specified coverage amount. Depending on your employer, you may be able to increase the death benefit with a premium deduction from your paycheck.
A universal policy also has a cash value component, where part of your premium is invested. The savings have the potential to accumulate over time, depending on the market. Usually, you can withdraw from the savings penalty-free. However, any withdrawals may reduce your death benefit until the money is paid back, often with interest.
One thing to note is that, in most cases, employers allow group universal life policies to follow employees to other jobs. However, when signing up, check the fine print to know what happens if you leave your employer.
What Are the Benefits of Group Life Insurance?
This type of policy has advantages for participants — there's a reason why these plans are so popular. Here are a few of the benefits:
- Coverage. A life insurance policy provides some financial protection for your loved ones after you pass. They can use these funds to pay for expenses, including housing. Without the death benefits, your loved ones may struggle financially after your passing.
- Price. For many, getting life insurance coverage for free (or very inexpensively) is an easy choice. While term life insurance policies available outside work are often more affordable than most people realize, group policies provide a level of coverage for little to no expense.
- Ease. With a group life policy, your employer does most of the heavy lifting. You only need to complete minor paperwork as part of your hiring and onboarding process.
- No exams. Many worry about getting life insurance because most coverage requires a medical exam. With group coverage, you can skip this step and get guaranteed acceptance, even if you're in poor health.
If you have specific questions about your employer's group policy, don't hesitate to ask your human resources department. The professionals there will be able to answer most of your questions or contact the life insurance carrier for you.
Also, confirm with your employer what happens if you leave your job. Group policies often don't move with you. However, some providers and employers will allow you to extend your coverage until you find a new job. They also may allow you to convert your existing coverage into an individual policy. Keep in mind that if you convert your policy, your premiums may increase.
What Are the Potential Disadvantages of Group Life Insurance?
When reviewing your options for life insurance, it's always a good idea to weigh the positives and the negatives. Learning as much as possible about each policy and how it may benefit or disadvantage you can help you pick the right coverage for your needs.
These are some of the main disadvantages of group coverage:
- Tied to your job. In most cases, your coverage is connected to your employer. So, if you change jobs, you may not be able to bring that policy with you.
- Generally low coverage. Your employer-sponsored group coverage may not be enough to cover your family's long-term financial needs if you were to pass and they lose your income.
- Limited options. Since group policies try to get as many people as possible into the pool, the coverage options are generally limited. You may not have the flexibility to pick from different options or add-ons, especially if you have specific needs.
If you run the numbers and determine you may need more coverage, you can look into purchasing additional life insurance. You aren't limited to having only one policy at a time. Many people consider buying an additional individual policy to help supplement their work group coverage because they've determined employer life insurance coverage isn't enough for their needs.
How Much Does Group Life Insurance Cost?
The overall cost of your life insurance policy typically depends on various factors. These include the type of policy your employer or organization provides, the number of people in the group pool and the specific coverage offered.
It's important to note that your employer can choose your premiums. For instance, your employer may provide free basic coverage equivalent to your current salary. However, if your employer allows you to purchase more coverage, you may need to pay a premium for that additional amount. Generally, employers will use a payroll deduction to pay those premiums, taking the funds out of your paycheck before taxes every payroll period.
Something else to note is that your coverage premium may increase as you age. Typically, those who are younger and healthier have less expensive life insurance costs. When your employer renews your plan, you may see an increase if you move into a new age range. These groupings vary depending on your insurance provider, but many operate in five- to 10-year brackets.
Is Life Insurance Taxed?
By law, the Internal Revenue Service states employers can provide up to $50,000 in tax-free group life insurance benefits.2 However, if you pay for more coverage, it's classified as a taxable benefit. Therefore, your employer must report this amount on your W-2, and it's taxed as income. On the other hand, when you die, your beneficiaries won't have to pay taxes on your death benefit (except in limited circumstances).
If you have questions about the implications of life insurance benefits over $50,000 on your taxes, speak with a tax professional. They will be able to explain the impact of this type of group policy on your tax situation.
Who Is Group Coverage Ideal For?
If your employer offers free group term or universal life insurance coverage, you may want to take advantage of that offer. Since you're getting a life insurance policy at little to no cost, you may feel reassured about having at least some coverage and a death benefit for your beneficiaries while you're in your job.
As you review any life insurance policy, the most important thing is to go over your numbers to find the coverage and death benefit you may need. That number may vary depending on your salary, debt, expenses and dependents.
For example, those who are young, healthy, unmarried, without kids and without debt typically don't require as much coverage compared to someone later in their career who is married with kids and a mortgage. A basic group policy may be all they need to cover funeral expenses. However, after doing the math you may determine that, beyond participating in your group term or universal life insurance, purchasing additional coverage will help you meet your coverage.
Consider meeting with a financial professional to review life insurance options and determine how much you may want. These individuals can work with you to review your current coverage, consider your long-term financial needs and help you sort through the policies that may work for you.
- Employee benefits in the United States — March 2021. U.S. Bureau of Labor Statistics. https://www.bls.gov/news.release/pdf/ebs2.pdf. Published September 23, 2021. Accessed July 11, 2022.
- Group-term life insurance. Internal Revenue Service. https://www.irs.gov/government-entities/federal-state-local-governments/group-term-life-insurance. Last updated October 18, 2021. Accessed July 12, 2022.