What Is Group Term Life Insurance?

Quick Answer

  • Group term life insurance is a type of life insurance offered to members of a group, like employees of a company or members of an organization.
  • A group term life insurance policy may not provide you with enough coverage, so you may need to take out an additional individual life insurance policy.
  • If you have group term life insurance through your employer, it typically ends when you leave your job. But you may be able to convert it to an individual policy.
A group of five employees are huddled around a table and laughing with each other at the office.

Life insurance can help you sleep better knowing your family is provided for if you die—but the cost of coverage could have you tossing and turning. Group term life insurance, which provides coverage at little or no cost, can help reduce your costs. Group term life insurance is a life insurance policy offered to members of a group, such as a company's employees. Discover how group term life insurance works and its pros and cons.

How Group Term Life Insurance Works

Term life insurance covers you for a set term—generally one to 30 years. If you die within that term, the policy pays a death benefit to your survivors. If the term ends before you die, you can apply for a new policy or possibly renew or extend your existing policy, usually for one year at a time.

Group term life insurance is term life insurance offered to all members of a certain group, such as all the employees at a company. The insurance is provided at a group rate, which is typically cheaper than purchasing the same coverage individually. Better yet, the organization offering the insurance generally pays all or part of the premiums for a certain amount of coverage.

Group term life insurance may be one of your employee benefits. Organizations such as credit unions, labor unions and professional associations may also offer group term life to members. Whether you get group term life insurance from work or from another organization, you may be able to purchase additional insurance at the group rate. This can be less expensive than buying an individual term life insurance policy.

Pros and Cons of Group Term Life Insurance

Group term life insurance has benefits and downsides to consider when you are determining which type of life insurance might be right for you.

Pros

  • Free coverage: Your employer or membership organization may pay the premium up to a certain amount of coverage.
  • Lower cost: You may be able to buy additional term life insurance at the lower group rate.
  • No exam: Applying for life insurance generally requires answering medical questions and having a medical exam. Most group term life insurance doesn't require this, although an exam may be needed to buy additional coverage.

Cons

  • Limited coverage: The coverage group term life policies provide is usually less than most people need to safeguard their family's financial future. For example, an employer might provide $25,000 in group term life insurance, while an organization might provide $1,000. Most experts recommend life insurance equal to 10 times your annual income. Depending on your financial obligations, you may need 20 or even 30 times your annual income. To get enough coverage, you'll need to buy more group term life insurance (if your plan allows) or buy an individual policy.
  • Limited time: When you leave your job or organization, you usually lose your group term life insurance. Some plans let you convert your group term policy to an individual policy. If yours doesn't, you'll have to seek life insurance elsewhere.
  • Higher future costs: Converting group term life insurance to an individual policy eliminates the advantage of the lower group rates. Premiums may rise even more if your health has declined since getting your group life policy. Even if you're healthy, getting older generally equals higher premiums. Whether you convert your policy or buy a new one, you'll probably pay more for life insurance than you did on your group plan.
  • May be taxable: Group term life insurance of over $50,000 (or over $2,000 for a spouse or dependent) is taxable if 1) the employer pays any of the premiums or 2) the employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee. Check with your employer or tax preparer to determine if your group life insurance is taxable. If it is, assess whether the lower cost of group life insurance outweighs the taxes.

Do You Need Group Term Life Insurance and Individual Life Insurance?

Buying life insurance is an individual decision. If you're single and no one depends on you financially, or if you're approaching retirement with a paid-off home and a healthy retirement fund to provide for your spouse, you may not need life insurance.

But even if no one needs your life insurance payout to live on, you might want to leave money to loved ones or charity or get coverage to pay burial expenses or debts. The limited amount of group term life insurance your employer offers may be sufficient for this.

If loved ones rely on you financially, life insurance helps ensure they're provided for if you die. Without life insurance, losing your income could leave a huge hole in your family's finances, making it hard for your spouse to pay the mortgage or send the children to college.

Consider Other Types of Life Insurance

For most people, group term life insurance is just one component in an overall life insurance plan. You can supplement it with other coverage, such as:

  • Individual term life insurance: Term life insurance lasts for a set term or up to a certain age and pays a death benefit if you die within that term. Premiums stay the same during the entire term. There are a few types of term life insurance:
    • Renewable term life insurance guarantees you can renew your policy after the term ends without a medical exam. You can't be denied coverage, even if your health has worsened, but premiums may rise because you're older.
    • Non-renewable policies aren't renewable, so you'll have to start fresh and reapply for insurance once the term ends.
    • Convertible term life insurance can be converted to permanent life insurance without a medical exam.
  • Permanent life insurance has both a death benefit and a cash value that earns interest. The coverage lasts your entire life (or up to age 99, depending on the policy) if you keep paying the premiums. Premiums stay the same during your lifetime. Permanent life insurance comes in three varieties:
    • Whole life offers a guaranteed cash value, but you can't adjust your premiums or coverage amount after buying the policy.
    • Universal life insurance also has a guaranteed cash value; however, you can change your coverage and premiums after purchasing the policy.
    • Variable life insurance does not guarantee cash value. Instead, it puts you in charge by letting you choose where to invest your cash account. This is riskier than whole or universal life, but could deliver higher returns.

Beyond Group Term Life Insurance

Whether you're applying for additional group term life insurance or an individual life insurance policy, insurance companies in many states check credit-based insurance scores before issuing coverage. Although these scores differ from consumer credit scores, they take many of the same factors into account. Low scores could mean higher premiums. Check your credit report and credit score before applying for life insurance to see if you need to improve your credit. You might save money on life insurance if both you and your credit score have a clean bill of health.

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