If you work for a company, the odds are decently high that you’re going to get some form of benefits. And one of those benefits could be group term life insurance. The Bureau of Labor Statistics reports that as of 2020, 60% of private companies and local and state governments provided their employees life insurance coverage through a group policy.
If you’re being offered this type of coverage through work, you probably have some questions. What does group term life insurance mean for your loved ones — and your paycheck? To help you get a handle on this employee benefit, let’s do a deep dive.
How does group term life insurance work?
Group term life insurance coverage — or any other kind of group life coverage — is life insurance that your employer essentially buys for you. Your employer works with the life insurance provider to get group term life insurance quotes and purchase a policy for all of their employees. That makes the coverage much more affordable than it would be if the policies were purchased individually.
Because your employer handles buying this coverage, you don’t need to worry about things like, “How is group term life insurance calculated?” Your employer deals with all of the logistics of putting the coverage in place, and all you need to do is opt in —assuming you’re eligible.
Each company sets its own eligibility requirements. That might be working there for a certain amount of time (e.g., 90 days) or working a specific number of hours each week (e.g., full-time equivalent).
Once you meet that requirement, you have the option to enroll in the company’s group term life insurance coverage. In some cases, you might even get automatically enrolled in this benefit.
This differs from individual life insurance in that eligibility comes down to your employment status, not your health. Individual life insurance usually requires a medical exam before you can get coverage (although no-exam policies are available).
Group term vs. whole life insurance
Here, we’re talking about group term life insurance (policies that expire after a certain term) rather than group whole policies (life insurance that lasts your lifetime) because term policies are much more common. While some employers do offer permanent life insurance coverage, most group policies offer term coverage. But is group life insurance term or whole at your workplace? Ask your HR department to find out.
Group vs. individual life insurance
The key difference when comparing group life insurance vs. term life insurance is that you get group life coverage through your employer, while you get and pay for individual term life insurance on your own.
You might also choose to do both, pairing a group policy with your own policy to give your loved ones ample protection after you’re gone. In that case, you might also want to weigh group term vs. whole life insurance to figure out which policy or policies are right for you. For help understanding term vs. whole policies, check out our guide.
Group term life insurance premiums
One of the major perks about this employment benefit is that your employer usually heavily —or even entirely — subsidizes your group term life insurance rates. In some cases, you might pay $0 out-of-pocket for life insurance through your work.
Your employer may also offer the option to increase coverage, often for a pretty nominal fee. And you may be able to add life insurance for your spouse and/or children at an additional cost, too.
Whether your base group term life insurance policy requires a premium or you opt to pay for additional coverage, your employer will usually deduct any amount you owe for this benefit from your paycheck.
Have you ever wondered, “What is the GTL deduction on my paycheck?” If so, you’re paying that amount because you either opted into the available group policy that requires a premium payment from you, or you chose to pay for expanded coverage.
Maintaining your group life coverage
Group term life insurance comes with one major caveat: the policy is only in force as long as you work for the employer. That means that if you quit, get fired, or retire, you will most likely lose coverage.
In some cases, you might be able to convert your group term life insurance policy benefits into an individual policy, but that depends on your employer and the group policy provider they’ve chosen. If you can convert the policy, you’ll be responsible for paying the premiums in their entirety.
Is group life insurance enough?
As you think about the future you want to create for the people who matter most to you, it’s important to consider what group term life insurance will mean as part of your overall financial plan. Here, there are a couple of things you should know.
First, generally, group life insurance doesn’t offer as much coverage as individual policies. Individual term life insurance often comes with a death benefit in the hundreds of thousands of dollars, while group policies usually extend a benefit closer to one or two years of your annual salary.
Secondly, because you can’t take group insurance with you into retirement, it can’t be part of your long-term financial plan. For these key reasons, many financial experts recommend viewing your group term life insurance coverage as a perk while putting your own life insurance policy in place.
Is group term life insurance taxable?
Since your group life insurance is a benefit you get from your employer, you might be wondering if it’s included in your gross income or subject to withholding. The answer is a little complex.
The good news is that the first $50,000 of your coverage is totally tax-free per IRC section 79.
The IRS considers anything above $50k as a taxable benefit, though, and you’ll see it reported on your W-2 as income. That means it’s subject to Social Security and Medicare taxes, too.
Individual life insurance works differently. Since you don’t see the death benefit during your lifetime, you don’t need to worry about taxes on it. And according to the IRS, your beneficiaries usually won’t need to report that death benefit when they do get it, meaning it’s not taxable.
Recap: group term life insurance pros and cons
Now that you have a good grasp on group life policies, let’s quickly go over the high and lowlights. This can help you determine if group life insurance is enough or if you want to seek out additional coverage.
All told, group term life insurance offers you an extra level of protection for your loved ones while you work for your current employer. But if you want to leave a legacy of financial security behind, you probably want to consider adding your own life insurance policy into the mix.
If you want help finding the right coverage for your specific goals for the people who matter most to you, don’t hesitate to contact our team of life insurance experts at Sproutt.