If you work for a competitive company in the United States, it’s possible that your workplace offers a life insurance policy as an added employee benefit. There are many advantages to enrolling—which we’ve listed below. But first, there are a few details to consider. You may be wondering if coverage through your employer will be sufficient to financially support your loved ones should the unthinkable happen, or if it’s better to sign up for supplemental individual coverage on your own.
To help untangle some of these considerations, we outlined the pros and cons of group term life insurance for your reference below.
What Is Group Term Life Insurance?
Group term life insurance is essentially a contract between your employer and a group of employees (your co-workers). It’s similar to individual coverage, except that the business is essentially the “owner” of the policy. There are two categories that fall under this type of policy: basic and supplemental.
- Basic: A basic group term policy is life insurance offered by your employer at little to no cost to you.
- Supplemental: A supplemental policy is any type of insurance you receive in addition to the basic policy offered through your work. Since group policies aren’t as robust as individual policies, many workers have their own insurance to ensure that the death benefit on their policy is sufficient for the needs of their beneficiaries.
How Does Group Term Life Insurance Work?
Group term life insurance works like an individual term policy in that they expire after a set period of time. Your premium is paid on a monthly basis to keep the plan active—and, depending on the details of your company’s specific policy, either you or your employer pays this monthly payment to the life insurance carrier. In the event that you pass away, the death benefit is paid out to your beneficiaries.
Seems pretty straight-forward, but there are a few nuances to this type of coverage that differentiates it from an individual term policy.
- Qualifying is easy. Unlike individual term policies where personal information about your age, gender, family history, and overall health are taken into consideration, insurers of group policies can guarantee coverage. This means the risk is not measured on an individual basis, but instead on the group as a whole—including the ratio of men to women applying, the type of work the company performs, and the spectrum of ages. The premium is thus determined by the collected statistics of the entire group.
- It’s convenient. Having a group policy through work means that you can easily enroll without having to research carriers and policies on your own time. The application process is also typically much shorter than if you were to go it alone.
- It’s affordable. Since risk is determined by a group in individuals, the monthly payments are typically cheaper—this is especially true if you happen to be applying later in life, aren’t in great health, or are pregnant at the time of enrollment.
- Coverage can be limited. If you were to receive a term policy on your own. Many employers want to offer robust benefits while also saving as much money as possible, and reduce overhead costs. Providing life insurance to their employees is no exception.
- It's usually temporary. There’s a risk that your employer discontinues offering it as a benefit, leaving you without life insurance. For this reason, it’s generally recommended by experts to think about group term life insurance as supplemental to having an individual policy.
- Lower death benefits. Typically 1-2 times your salary—and that amount may not be enough for your beneficiaries to live on should anything happen to you. This deviates from an individual term policy where the death benefit is much higher.
- It can go up. When compared to a term life insurance policy where your rate is “locked in” for a period of time, your group term rate could increase as you age.
What Are The Tax Implications Of Type Of Coverage?
There are several tax implications to having group term life insurance. It’s a nontaxable benefit—up to a certain amount—and the first $50,000 you pay for the policy is excluded from each of the employee’s taxable income (the rest must be included). Anything above the base that you (or your employer) pays is also subject to Social Security and Medicare taxes, so, this is important to consider before applying.
Any policy is better than no policy. Even if your company doesn’t offer group term life insurance, having an individual option can ensure the financial security of your loved ones and give you greater peace of mind. Find out for yourself, and get a quote from Ethos by applying online.