Everything Employers and Employees Should Know About Group Term Life Insurance (2024)

Financial security is an important part of life and a goal that many people set for themselves. One way to achieve that is through collective protection or group term life insurance. This type of coverage is a compelling solution that offers a safeguard to a group of individuals under a single policy.

Whether you're an employer looking to provide a valuable benefit to your employees or an individual in search of affordable life insurance options, group term life insurance offers a few advantages.

Here's everything you need to know about group term life insurance, including what it is, who it's for and how it compares to other policies.

What is group term life insurance?

As indicated by its name, group term life insurance is a type of policy that's offered to members of a particular group, such as employees of an organization. It provides employees peace of mind knowing that, if they passed away, their families would receive a death benefit to sustain financial security and help cover any expenses, such as funeral costs.

Group size requirements vary between insurance providers. The minimum could be as low as 5 members or as high as 25. Still, they may offer flexibility in terms of required group size based on a group's circ*mstances. In some cases, actuaries can work directly with providers to explore specialized options for smaller groups.

Standard coverage amounts for group term life insurance usually correlate with an employee's annual salary. So, if someone makes $45,000 per year, they would be covered for that amount under the policy. However, some insurance providers may cover up to one or two times a team member's salary.

The key benefits and features of group term life insurance

Like any life insurance policy, there are lots of benefits that policyholders could experience. And in the case of group term life insurance, there are even a few perks for employers, too.

First, let's take a look at a few of the pros for employees:

• Affordability: Group term life insurance policies typically have lower premiums compared to individual life insurance policies. Since the cost is spread across the entire group, employees can enjoy the benefits of life insurance at a more affordable rate. In some cases, the employer may even cover the full cost.
• Convenience: Group term life insurance often includes automatic enrollment for eligible workers. This means employees don't have to go through the hassle of individually applying for coverage or undergoing medical underwriting to qualify.
• Spousal and dependent coverage: Many group term life insurance plans extend coverage to employees' spouses and dependent children. This means that not only the employees themselves can benefit from the financial protection provided by the policy, but their loved ones can as well.

Employers can gain value from providing group term life insurance, too. Here are a few advantages of supplying this type of policy:

• Improve recruitment and retention: Offering a robust benefits package for employees can help attract the highest quality candidates, by showing that they're committed to the well-being of employees. In turn, this can help decrease turnover and improve productivity.
• Administer easily: Group term life insurance is relatively easy to administer compared to individual policies. Employers typically handle the paperwork, premium collection and policy management, reducing the administrative burden on employees. Insurance providers also offer streamlined processes and dedicated support for employers' convenience.
• Gain tax advantages: For policies carried directly or indirectly by an employer, group term life insurance is a tax-deductible business expense up to a coverage amount of $50,000. This can result in cost savings for the company, making it a financially advantageous option.

Potential drawbacks of group term life insurance

While group term life insurance offers numerous advantages, it's important to consider the potential downsides for employees and employers to develop a full understanding of this type of policy.

Potential disadvantages for employees

While more affordable and convenient than other forms of insurance, group term life insurance may force employees to make some sacrifices. Here are a few disadvantages for this type of policy:

Limited coverage

Group term life insurance policies often come with a predefined coverage amount, which may not be sufficient for individuals with higher financial responsibilities or specific needs. Employees with significant financial obligations, such as mortgages or dependents, may find the death benefit insufficient to fully protect their loved ones if something were to happen to them.

Lack of portability

Group term life insurance is typically tied to employment and, therefore, not permanent. When an employee leaves or is removed from a company, their coverage under the group policy usually ends. In cases like this, an employee may choose to apply for an individual policy, however, the older you are when you apply for individual coverage does affect insurability. The longer you wait, the more expensive it may be due to age or developing health conditions.

On the bright side, some organizations will offer convertible term insurance wherein an employee has the option to switch their coverage from a group plan to an individual plan if they leave the company. It's important to note that this isn't the case across the board, and it depends on how the employer sets the policy up.

No customization

Group policies are designed to cover a large number of individuals under a single policy. As a result, they may lack the customization options available in individual life insurance policies. Thus, employees may have limited control over policy features such as coverage duration, riders or beneficiary designations, as these are determined by the employer or insurance provider.

Potential disadvantages for employers

While group term policies may not have any direct disadvantages for employers, there are a few things that can be tough to swallow. For instance, group term life insurance is not usually adequate enough coverage for most employees. Many insurance companies will advise that team members should be covered for at least 10 times their salary, and since group plans often just match salary, it can leave gaps.

Group term life insurance eligibility criteria

While every insurance company and organization are different, there are a few group term life insurance criteria that employees are commonly required to meet before enrolling. Once these criteria are met, employees are generally enrolled automatically.

The following are a few familiar preconditions and limitations for group term life insurance:

• Work activity: Some organizations will require employees to work a certain amount of hours per week to be eligible for the insurance policy.
• Tenure: Beyond hours worked, it's also common to see a tenure requirement to enroll in a workplace's group term life insurance policy.
• Age limits: It's not uncommon for group term life insurance plans to have minimum and maximum age limits for eligibility. Typically, the minimum age requirement is 18 or 21 years, while the maximum is around 65 or 70. Keep in mind these can vary.

Additionally, any dependents on a group life term insurance policy may be required to meet certain criteria. For example, being legally married or having a dependent child under a certain age are typical.

To learn more about group term life insurance and other popular insurance policies, today.