Group Life Insurance

What Is Group Life Insurance?

Group life insurance is life insurance that is purchased under a single contract covering a group of people. Typically, the policyowner is an employer or other entity such as a union, and the policy covers the employees or members of the group. Group life insurance may be part of an employee benefit package. Group life insurance is available to companies with as few as 10 employees.

How Is Group Life Insurance Issued?

Group life insurance is somewhat different from your personally owned life insurance. The policy itself is different, as are the underwriting criteria and the eligibility requirements. The following is a more detailed explanation of some of the unique characteristics of group life insurance.

Certificates Of Insurance And Master Contract

Typically, each insured member of the group receives a certificate of insurance. This certificate states that the insured member of the group is covered under the master contract held by the employer. Also, the provisions of the group insurance are usually stated in the certificate of insurance.

This certificate serves as proof of insurance, but it is not the actual insurance policy. The employer typically keeps the policy, or master contract.

Group Underwriting

Underwriting for group life insurance is not the same as underwriting for individual life insurance. If you bought individual insurance, you probably had to demonstrate to the insurance company underwriter that you were in good health and therefore insurable. This may have involved completing an application, answering health-related questions, and undergoing a medical examination. Group life insurance is different. There may be no requirement that individual members of the group show any evidence of insurability when they are eligible for group life insurance coverage. Usually, the underwriters are interested in the characteristics of the group as a whole rather than the medical information of the individual members.

Adverse Selection

Adverse selection means that people who are most likely to die as a result of poor health or dangerous occupations are more likely to purchase life insurance, and those who are less likely to die from such hazards are less likely to purchase life insurance. This might sound like simple logic, but it can be a serious problem for insurance companies issuing group insurance policies. Group insurance typically allows the insurer to spread risk over a large number of people, some of whom will eventually receive a death benefit while some won't. If adverse selection occurs, the insurance company takes on an unacceptable degree of risk.

To avoid adverse selection, insurance companies have established the following criteria for issuing many group insurance plans:

The group must be large
Most or all members of the group must participate
Insurance must be incidental to the group's operation, not its primary reason for existing

Insurance companies are aided by the fact that most companies experience a constant cycle wherein older employees leave the group through retirement and are replaced by younger employees.

Contributory Versus Noncontributory Plans

Under a contributory group plan, you are expected to pay part of the premium for group life insurance. To avoid adverse selection, the insurer typically requires that at least 75 percent of eligible employees participate in the plan. Under a noncontributory plan, the employer pays the entire premium. Insurance companies typically require 100 percent of eligible employees to participate in noncontributory plans. Employers are allowed to set their own guidelines for determining who is eligible to participate in the plan.

The following are typical minimum standards for a noncontributory plan:

The employee must work full-time
The employee must be actively at work (e.g., not on disability or other leave)
The employee must have completed a minimum probationary period (usually 90 days, although it may be longer or shorter)

These are typical eligibility requirements. Employers may set more restrictive qualifications for noncontributory plans as long as they do not expose the insurer to adverse selection. Many employers consider length of service and salary level in determining eligibility for a noncontributory group life insurance plan.

If the plan is contributory, the same minimum standards typically apply. However, most insurers require one further qualification: You must apply for coverage within a specified time after the completion of the probationary period (usually 30 days). At the end of this eligibility period, you may be required to take a medical exam to prove your insurability.

When Do Employers Offer Group Life Insurance?

Group life insurance is offered by many companies as part of an employee benefit package. The following are some instances when an employer might be more likely to offer group life insurance.

When Your Employer Wants To Provide Fringe Benefits

An employer may want to provide a fringe benefit that is valued by employees. Group life insurance can be especially beneficial because it pays a substantial benefit at a crucial time when your family is in need. Your employer will probably pay at least a portion of the premium, and your cost is typically minimal.

When Your Employer Wants To Maximize Income Tax Deductions

Your employer is allowed to take an income tax deduction for group life insurance premiums paid by the employer. Also, premiums might be paid out of funds that would otherwise have to be reported as income to the employer.

What are the advantages to an employer offering group life insurance?

Helps to attract and retain employees

An employee benefits package, including group life insurance, can help a company attract and retain qualified employees.

Tax deductions available

An employer offering group life insurance is allowed to deduct premiums paid for group life insurance.

What are the disadvantages to an employer offering group life insurance?

There are also certain disadvantages that might prevent an employer from offering group life insurance.

Group life insurance is considered a welfare benefit plan and is subject to specific requirements under the Employee Retirement Income Security Act (ERISA). Because of these requirements, some employers may not want to deal with the red tape.
Because of the risk of adverse selection, premiums on group life will likely increase if the average age of the group increases. The cost may become too high for your employer if no younger employees come into the plan or if older employees do not retire when expected.

When is employer-provided group life insurance important to you?

If group life insurance is offered by your employer, you will typically pay less for this coverage than you would for a similar individual life insurance policy. You should generally take advantage of such an offer, especially if you have no other life insurance coverage or if your personal coverage is inadequate.

When you have difficulty getting insurance coverage

Since group life insurance is issued without individual proof of insurability, it may be an important benefit if you have a medical problem or you work in a dangerous occupation. Under these conditions, you might have difficulty finding an insurer willing to issue an individual policy. If you were able to find coverage, it would likely be very expensive.

Keep in mind that an insurance company would probably not issue group coverage to an employer whose business is considered extremely dangerous (e.g., demolition).

What are the advantages of having group life insurance?

Provides life insurance coverage at a usually reasonable cost to you
Premiums paid by your employer for life insurance coverage up to $50,000 are not taxable to you
Permanent life insurance policies, such as group universal life and group whole life insurance, accumulate cash value and may provide you with needed cash to take care of extra or unexpected expenses
If you are in poor health, group life insurance may provide you with coverage you might otherwise not be able to obtain
Since younger employees frequently join most employers, group life insurance premiums tend to stay level
Group life insurance plans can often be converted to individual coverage if you leave your employer

When a group policy is converted to an individual policy, your premiums will increase.

What are the disadvantages of having group life insurance?

Coverage may end when you leave your employer, if you don't have the opportunity to convert group coverage to an individual policy
The employer is under no obligation to continue offering group life insurance coverage

What are the tax implications for you?

The premium cost for the first $50,000 of life insurance coverage provided under a group term life insurance plan does not have to be reported as income and is not taxed to you. On the other hand, the cost of coverage above $50,000 (less any premiums paid by you) is considered taxable income to you.

The tax exemption on the first $50,000 of group term insurance coverage is not available to key employees if the plan discriminates in favor of the key employee as to eligibility and/or type and amount of benefit.

Death proceeds paid under a group life insurance plan are generally received by the beneficiary free of income tax. You should consult your tax professional concerning your specific situation.

Group Term Life Insurance

Term insurance is the most common form of group life insurance. Group term life insurance is typically provided in the form of yearly renewable term insurance. Your employer will pay for most (and in some cases all) of the premium. The amount of term insurance on your life is generally equal to one or two times your annual salary or annual total earnings. You typically do not get to choose the amount of term coverage. Your group term coverage will remain in force until your employment ends or until the specific term of the coverage ends. Generally, you have the option to convert your group coverage to an individual policy if you leave your employer. Most people do not convert group term coverage because individual premiums tend to be much higher than group premiums. In most cases, only those who are otherwise uninsurable take advantage of this conversion option.

In most cases, group life insurance plans allow a low amount of coverage (e.g., $5,000 or $10,000) on your spouse and children. A spouse's life insurance is typically convertible, and a child's coverage generally is not. Both you and your employer may enjoy certain income tax advantages related to group term insurance, as long as the plan is set up according to specific provisions of the IRS Code.

Group Whole Life Insurance

Group whole life insurance is permanent coverage. In most cases, group whole life coverage is set up using a combination of term and whole life insurance to keep the premium at a manageable level. Group whole life insurance has a fixed premium. You will typically pay the portion of the premium that covers the whole life part of the plan, while your employer usually pays the portion of the premium related to the term part of the plan. Group whole life insurance accumulates a cash value, and some group whole life plans even pay dividends. There are varying tax issues, depending on who is paying the premiums--you, your employer, or a combination. You should consult additional resources for the tax implications related to your specific situation.

Group Universal Life Insurance

Group universal life insurance is the least common type of group life insurance plan, but it is also the most flexible. You can reduce the premiums, increase the premiums, or even eliminate the premiums entirely if the cash value is adequate to pay the mortality and expense charges. In addition, you may select the level of death benefit. This is generally equal to a multiple of your salary, for example one to five times your annual salary. If you want a higher level of death benefit, the insurance company may require you to provide evidence of insurability.

You may elect from a number of plan designs. If you want term insurance only, you would pay the mortality and expense charges. On the other hand, if you want to accumulate a cash value, you would pay a higher premium. You might want a combination of term insurance and an accumulation of cash value. The flexibility of group universal life insurance makes all these options possible.