As the name says, group term life insurance is a type of term life insurance that covers all members of a particular group. So, employers often offer it as part of their employee benefits package.
This article is for all people that work in companies where an employer offers group coverage. We will help you decide whether to choose group term life insurance or stick with a standard individual life insurance policy and cover:
- What is a group life insurance policy?
- How does group life insurance work?
- Benefits and drawbacks of group insurance.
- What requirements are required for group term life insurance?
- Group life insurance vs. Whole life insurance: which one is better?
- How to reach financial freedom?
Let’s jump in!
What Is a Group Term Life Insurance Policy?
Group term life insurance is life insurance that is offered as a part of the employee benefit from the firm. It also can be provided by other groups, like a labor union or professional organization.
The basic idea is to cover an entire group of people with just a single contract. It’s important to note in the beginning that the term in term insurance means that basic death protection lasts for a limited period, usually from one to 30 years.
If the insured dies within that term, the policy pays a death benefit to their family. But if the policyholder didn’t die, they can apply for a new policy or possibly renew or extend their existing one. This type is called renewable term life insurance.
Since the employer pays a portion in group term life insurance, group term life insurance typically costs less than an individual policy. In some cases, employers pay the premium, and then this benefit is free of charge to their employees.
The maximum employer can provide without a tax implication is $50,000 (or over $2,000 for a spouse or dependent). If they offer more than that, employees have to pay income taxes for the amount above the maximum and claim the death benefit as part of the insured’s wages.
Also, the employer arranges for the premium payments, and the premiums paid by at least one employee subsidize those paid by at least one other worker.
How Does Group Life Insurance Work?
Group life insurance support coverage for every group member with one insurance policy. It’s a great idea, but the problem is evident from the start – there is no option for customization for every individual. It’s not uncommon for a basic policy to have a death benefit equal to about one or two times the individual’s yearly salary.
In addition, some individuals aren’t part of a group like labor organizations, associations, or employers that offer it.
Although it is usually more affordable than an individual policy, and for some people, it might be a better option because with some group life insurance policies individual doesn’t have to go through any medical exam or medical questions.
Group life insurance can vary from firm to firm, so it would be wise to consult with the plan’s administrator and read the application carefully. Since it can change, every insurer is responsible for financial obligations under the policies or contracts it issues, securities, investment advisory services, and insurance products.
Side note: with some group term life insurance policies, there is an option to purchase additional insurance for employees’ spouses and children, but it also requires extra checking.
When the application is approved, an individual starts to pay monthly premiums if their employer doesn’t cover it. In case of accidental death, while the person is ensured, their beneficiary gets the death benefit.
With group term life insurance, regularly reviewing life insurance coverage is important to ensure that the money will go to the right person when the insured dies. Another essential aspect of group life insurance that diversifies from company to company is whether you can take your policy after leaving a firm or not.
Most group term life insurance policies end when the employment contract is terminated.
This is not favorable for younger people who have many years before retiring and open chances to find a better job and change the employer.
However, some employers still allow workers to take their life insurance coverage with them. It is often in the form of ”porting” the term policy by converting it to a permanent policy.
On the one hand, it’s a solid option because the person doesn’t have to apply for new coverage. But on the other hand, there is a chance that it’s impossible to convert to a permanent policy, and then premiums will increase over time.
Benefits and Drawbacks of Group Term Life Insurance
Like any financial product, group life insurance has its pros and cons.
Benefits
- Budget-friendly. We know premiums can be expensive, and it’s not achievable for some people. That is not the case with group life insurance. For people with a smaller budget, it can be a good low-cost way to ensure life insurance.
- In most cases, without a medical exam. Often every member can apply for this policy regardless of their health history. This benefit is especially relevant for people with health problems because, with other types of policies, their monthly premium would be much higher if they could apply at all.
- Help with covering the premium. Some employers support their employees by paying all for their premiums. Others choose to cover some of the monthly payments, but lowering the cost is also helpful.
Drawbacks
- Not enough coverage. With group term life insurance, the death benefit is typically smaller than when you get the policy on your own. Of course, this depends on how much life insurance you need. Still, for most people, this isn’t enough to provide for their beneficiaries, and they also buy an individual plan to add additional coverage.
- The policy ends when you quit your job. This is a huge drawback because nothing guarantees that we want to stay in one company for the rest of our working years.
- Tax ramifications. Anything over $50,000 is considered taxable income.
What Requirements Do You Need for Group Life?
After meeting the eligibility requirements, all employees are immediately enrolled in the base coverage. Once again, requirements vary from employer to employer. So, for some, it will include a certain number of working hours per week, and for others, it will be a certain amount of time as an employee.
The same occurs for the supplemental group term. In some plans, enrollment is only applicable when the worker is initially employed or upon a qualifying life event (usually marriage, the birth of a child, etc.). On the other hand, in other plans, it’s possible to add supplemental group term coverage during open enrollment periods.
In some cases, supplemental coverage expects underwriting. It’s a simplified process that requires answers from the insurance seeker to check eligibility instead of going through a physical exam. After that, the carrier decides to offer the additional coverage or reject it.
Group Term Life vs. Whole Life Insurance Policy
The most significant advantage of group term life insurance is lower or free premiums. It may sound attractive, but the critical question is what you get with that money.
Firstly, it’s crucial to understand the main difference between term and whole life insurance. A whole life policy is one kind of permanent insurance, meaning the policy lasts your entire lifetime. In contrast, the term lasts for a specific pre-set period.
A whole life policy is more valuable as a component of your financial plan. So, although whole life has higher premiums than group life insurance, it also lasts for your lifetime nevertheless of your employment. That means you can change jobs and don’t worry about your policy. Additionally, it includes a growing cash value component that supports you with the funds you can access and use for any reason you wish!
Besides that, a whole life insurance policy often pays dividends, adding value beyond your death benefit. It might be more expensive, but the advantages of the whole life policy are remarkable. Unlike group term life insurance, you are in complete control. You are signing a private contract between the insurance company and yourself. You can access it whenever you like, without penalties or any issues.
We mentioned that there is no possibility for customizations with group term life insurance. With permanent life insurance, you have at your disposal additional features and benefits that can be added to your policy to suit your specific needs. You can also choose a coverage amount that meets your beneficiaries’ needs.
Another fantastic advantage of whole life is tax benefits. The value is growing at a tax-free rate because you put into policy the after-tax dollars. Also, even though any premiums paid towards life insurance are not tax-deductible, it has a maximum limit of $50,000. In the whole life policy, you don’t have any restrictions, which makes sense.
One more important note: a whole life insurance policy might be more expensive, but it doesn’t mean it is. Namely, the cost of an individual life insurance policy depends on many factors such as years and the health state of the applicants. It means that if you’re younger and healthier, your premium costs will be lower! That is one of the reasons why it’s the suggestion to start your financial planning early.
Reach Financial Freedom With Infinite Banking Concept
When it comes to a life insurance policy, we firmly believe that a whole life policy should be the number one choice. But there is another reason for that: whole life policy opens a door for Infinite Banking Concept or over-funded life insurance.
Over-funded life insurance is a financial strategy based on using a whole life insurance policy as a personal endless banking system. One of the results of using over-funded life insurance is that you become your own banker.
Thus, you are using all aspects of the policy – life insurance coverage and the possibility to replicate the banking system by using your own money. With a whole life insurance policy, policyholders have a cash value benefit. After every premium payment, a portion of that money goes towards a savings portion of the policy – cash value.
Payment after payment, the cash value collects at a taxed-free rate and can be utilized as needed. That means you can pay off debt, use it as a down payment on a house or buy additional coverage. At this point, the infinite banking system starts.
This is the best way to control your finances, secure the future for you and your loved ones and own your life!
Final Thoughts
A group term life insurance policy is an excellent way for businesses to provide financial protection for their employees if something happens.
However, as we’ve seen, whole life insurance policies offer much more comprehensive coverage and peace of mind for everyone involved.