Group Life Insurance: How It Works, Types, Pros & Cons
An employer or another large-scale entity, such as an association or labor organization, provides group life insurance to its employees or members. It is reasonably priced, and in some cases, free, for certain employees, and is widely used across the country.
Group life insurance is frequently offered as part of a larger employer or membership benefit package and has a relatively low coverage amount. Members of a group life policy are not required to undergo a medical exam and are not subject to individual underwriting.
Understanding Group Life Insurance
A group life insurance policy is a single contract that provides life insurance coverage to a group of people. Companies can secure much lower costs for each individual employee than if they purchased an individual policy by purchasing group life insurance policy coverage on a wholesale basis through an insurance provider for its members.
Group life insurance recipients may not have to pay anything out of pocket for policy benefits. People who choose to add more advanced coverage may elect to have their premium payment deducted from their paycheck. Just like with regular insurance policies, insured parties must name one or more beneficiaries before the policy takes effect. Beneficiaries can be changed at any time during the policy's term.
The typical group policy is for term life insurance, which is frequently renewed each year as part of a company's open-enrollment process. In contrast, whole life insurance provides coverage regardless of when you die. Whole life insurance policies are the most common type of life insurance because they are permanent, have higher premiums, and provide higher death benefits.
When purchasing group life insurance for its employees or members, the employer or organization retains the master contract. Employees who choose group coverage typically receive a certificate of coverage, which they must provide to a subsequent insurance company if they leave the company or organization and their coverage is terminated.
Requirements for Group Life Insurance
Conditions are usually attached to group life insurance policies. Some organizations require group members to participate for a set period of time before receiving coverage. For example, an employee may be required to complete a probationary period before being eligible for employee health and life insurance benefits.
Coverage is typically only valid for the duration of a member's membership in the group. The coverage ends when the member leaves, whether by resignation or firing.
Advantages and Disadvantages of Group Life Insurance
Employees are most drawn to group life insurance because of its low cost. Members of a group typically pay very little, if anything at all. Any premiums are deducted directly from their gross weekly or monthly earnings. Group policies are simple to qualify for, and coverage is guaranteed for all group members. Group insurance, unlike individual policies, does not require a medical exam.
However, low prices and ease of use aren't everything. Group life insurance typically provides only basic coverage, which may not meet the needs of policyholders. Typical payouts range from $20,000 to $50,000, or one to two times the insured's annual salary. That is why, according to experts, it should be viewed as a perk to be supplemented with a separate individual policy rather than as sufficient standalone coverage.
Another disadvantage is that the policy is controlled by the employer, which means that your premiums may rise as a result of decisions made by your employer. When a company decides to discontinue group life insurance or a person decides to change jobs, coverage usually ends. The former employee can, however, continue coverage at the individual level. This means that the policy has been converted from a group life policy to an individual policy, with higher premiums. While many people may object to the higher cost, those who would otherwise be uninsurable will benefit from the conversion because no medical exam will be required.
Some organizations permit group members to purchase additional coverage in addition to basic life insurance. Even though the additional premium will be based on the less expensive group rate, the extra voluntary coverage may make financial sense. That aspect of the policy may also be transferable between jobs. In contrast to the basic group policy, additional coverage frequently requires applicants to complete a medical questionnaire but may not require a physical exam. That could be a good option for people whose health issues make qualifying for an affordable individual policy difficult.
Group Life
Pros
- No medical underwriting
- Inexpensive to buy (or paid by the employer in some cases)
- May be able to add coverage for dependents
Cons
- Death benefits are relatively low.
- Not portable once you leave the organization
- The policy and its terms are under the control of the organization.
Frequently Asked Questions
What Is the Purpose of Group Life Insurance?
Group life insurance is a common employee benefit that pays a death benefit to the insured's beneficiaries if the insured dies while working for the company. The goal is to provide financial assistance to the employees' families.
What Happens to Group Life Insurance Coverage After I Retire?
When you leave the company, your group life insurance coverage ends (either immediately or after a short grace period). Being fired, quitting, changing jobs, or retiring are all examples. When an employee retires, he or she may be able to convert their group coverage into an individual policy, but the employer may not continue to pay the premiums.
What Are the Types of Group Life Insurance?
The most common type of group life insurance is annual renewal group term insurance. This type of insurance only provides a death benefit and is the most affordable option. Group universal life insurance is more expensive, but it allows you to accumulate cash value in addition to the death benefit. Variable group universal life is similar, but it includes an investment option for increasing the potential cash value returns.