You may have heard about group term life insurance through an employer or an organization you are a member of, like a labor union or professional association.
Life insurance can help provide a little protection for your loved ones. For example, if you were to pass away with a life insurance policy in force, your beneficiaries can use the death benefit to help pay for living expenses, cover a mortgage, or start a college fund. There are no stipulations when it comes to spending a life insurance payout.
If you’ve recently started a new job or your employer is offering life insurance as a benefit for the first time, it’s helpful to understand what group term life insurance is, how it works, and how you can build upon it if you need more coverage.
What Is Group Term Life Insurance?
Group term life insurance is a type of term life insurance that covers a group of people, typically employees at a company or members of an association.
Some companies offer group term life insurance as a benefit to their employees. This coverage is typically provided at no cost to the employee.
How Does Group Term Life Insurance Work?
Group coverage is typically free or inexpensive. For this reason, most people who work for an employer that offers group term life insurance as a benefit choose to participate.
If life insurance is part of your employee benefits package, it's a good idea to review your company’s group plan and understand the basics of term life insurance.
What is Term Life Insurance?
Term life insurance provides coverage for a period of time called a term, typically ten to thirty years.
When you buy an individual term life insurance policy you will select a term and coverage amount, and pay a periodic premium to keep the policy in force. If you pass away insured, your beneficiaries can receive the policy's death benefit.
Individual term life insurance is relatively straightforward, but how does group term life work differently?
Group Term Life Insurance Versus Individual Term Life Insurance
Group term life insurance is a form of term life insurance. The typical term period of group term life insurance varies and is usually determined by an employer or administrator.
Most organizations offer yearly renewable group term life insurance. To qualify for renewal, you typically need to be employed or a current member of the organization.
While the basics are similar, there are three key differences between individual term life and group term life insurance.
- Coverage amount: If your employer offers group term life insurance, the coverage amount provided is typically set. Some companies use employees' annual salaries as their base coverage amount.
- Premium payments: The other standout feature of group term life insurance is that the employer typically pays the premium the employee’s base coverage.
- Locked in rates: When you buy an individual term life insurance policy, you lock in your rate for the entirety of your policy's term. This factor is important because life insurance rates typically increase with age. For example, if you buy a thirty-year term policy at age twenty-five, your rate is locked until age fifty-five.
In lieu of locked-in rates, group term life insurance contracts typically feature rate bands that increase premiums in increments with the employee's age.
Adjustable rates might not seem concerning if your employer is paying the premium. But something you may want to consider if you plan on purchasing supplemental coverage or if your policy isn't portable.
How Do You Name Beneficiaries with Group Term Life Insurance?
When you sign up for group term life insurance, you will get to name your beneficiaries and receive a certificate of insurance. It's a good idea to let your beneficiaries know about your coverage so that if anything were to happen to you, they will know where to file their death claim.
Pros and Cons of Group Term Life Insurance
Let’s be clear: Free life insurance is always a good thing. The pros and cons below are listed to provide a clear definition of group term life insurance and how it works.
Pros of Group Term Life Insurance
No or low-cost life insurance. Your employer or the organization you are a member of may pay the premium on your group term life insurance coverage. If your company offers no-cost life insurance coverage, there is no reason not to take it.
Easy to qualify: Group term life insurance doesn't typically require participants to submit a medical exam.
It’s convenient: If your employer offers group term life insurance as a benefit, the onboarding process is usually fairly simple.
Cons of Group Term Life Insurance
Capped coverage. Whether offered by an employer or an association, the amount of group term life insurance you can get is usually limited. Some organizations provide a flat amount of coverage. Some employers use your annual salary as a multiplier to determine how much coverage you get.
Here's the kicker: what they provide may fall short of your coverage needs.. Take a moment to review your financial situation: student loans, credit card debt, mortgage, income, future goals. Is your group coverage enough to help your loved ones cover these costs if you were to pass away?
Dependent on association: How does group term life insurance work if you are no longer employed or associated with the organization providing the benefit to you? It depends on the plan. If you leave the company providing your life insurance, you will typically lose the coverage, though some group term life policies can convert to individual policies.
Future cost increase: Let's say you leave the organization providing your group term life insurance and convert to an individual policy. You'll likely lose the group rates and pay a higher individual premium. Likewise, if you decide to apply for an individual life insurance policy on your own. Not only are group rates lower, but life insurance rates, in general, increase with age.
Might be taxable: If you have group term life insurance of over $50,000, anything over that amount may be considered taxable income.*
*Bestow does not give tax or legal advice. The information provided is not intended to offer any tax, legal or financial advice. It is always a good idea to consult your tax, legal and financial advisors regarding your specific situation.
Why Do People Buy Individual Term Life Insurance (When They Already Have Group Coverage)?
One reason people with group coverage buy individual term life insurance is portability.
One of the most significant benefits of an individual term life insurance policy is that it goes where you go. As long as you pay your premium, your policy is in force for the entire term. So if you quit your job to become a content creator or lose your job in a layoff, you would still have your individual insurance policy.
Portability is important because life insurance rates increase with age. Should you find yourself applying for a new policy later in life, coverage will likely be more expensive (in comparison to applying for a policy with the same death benefit at a younger age).
Another reason — coverage amount. Some people choose to buy an individual term life insurance policy because the amount of life insurance their employer provides isn’t enough. There is no exact formula, but you can use this life insurance calculator guide to figure out how much coverage you may need.
Individual Term Life Insurance with No Medical Exam
Ready to purchase an individual term life insurance policy? Bestow makes it incredibly easy. You can apply online in minutes. There is no medical exam. No blood test. Just you, a short questionnaire, and a couple of clicks.
Start with a free quote. You'll get an estimate in seconds, and you might be surprised to find out just how inexpensive term life insurance can be. Rates with Bestow can be less than $1 per day (that's probably less than you spend on coffee).
Key Takeaways
- Group term life insurance is typically offered by employers or membership associations.
- How does group term life insurance work? A lot like individual term life insurance with a few critical exceptions — portability, coverage caps, and adjustable rates.
- Many employers offer group term life insurance as a benefit. There is no reason to decline free coverage, but there may be some disadvantages to solely relying on group term life insurance for coverage.
