Richard Rosen is a financial planner and an expert in writing about financial planning topics. He has 20+ years of experience as a CFP®.
Updated August 08, 2023 Reviewed by Reviewed by Marguerita ChengMarguerita is a Certified Financial Planner (CFP), Chartered Retirement Planning Counselor (CRPC), Retirement Income Certified Professional (RICP), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.
Part of the Series Life Insurance Through WorkEmployer Provided Insurance Definitions
CURRENT ARTICLETypes of Employer Provided Insurance
Employer Provided Insurance Considerations
Many employers provide group term life insurance as a benefit for their employees. Some employers also make it available to the employee’s spouse and dependents.
If you’re covered by a group policy at your job, then it’s important to understand how it works and whether your employer’s coverage is enough to meet your needs.
Group term life insurance is a common part of employee benefit packages. Many employers provide, at no cost, a base amount of coverage as well as an opportunity for the employee to purchase additional coverage through payroll deductions. The insurance plan also may offer employees the option to buy coverage for their spouses and children.
Like other types of life insurance, group term life insurance pays out a death benefit to your designated beneficiary if you pass away while the policy is in effect.
Group term life insurance covers not just you but your co-workers. You’re covered by the policy for as long as you’re employed by the company.
These policies aren’t necessarily the same from one company to the next, however. Employers can determine the size of their death benefit, whether to allow employees to increase their death benefit, and whether to make coverage available for spouses and children.
Here’s a closer look at what to consider when evaluating a group term life insurance policy.
The coverage offered through a group plan varies among employers. The amount of coverage available to you also may differ depending on where you are in the organizational hierarchy.
Benefits for highly paid executives and managers may be more robust than those offered to lower-level or hourly employees. Some upper-level employees may be eligible for both a group policy and their own individual one, through what’s known as a group carve-out plan.
Many group plans only cover an individual’s base salary or some multiple of it. Other forms of compensation may be excluded, such as bonuses, sales commissions, or incentives that are reported as income—for example, an auto reimbursement or a restricted stock award.
Your employer may provide a certain amount of coverage free of charge. If you wish to buy additional coverage, what you’ll pay for it will depend, in large part, on your age.
Group term coverage is generally inexpensive, especially for younger workers. However, the rates go up as individuals age. Most plans also have rate bands in which the cost of insurance automatically goes up in increments—for example, at ages 30, 35, 40, etc. The premiums for each rate band are outlined in the plan document.
For group plans, all employees are typically enrolled in the base coverage automatically once they meet the eligibility requirements. Those requirements might include working a certain number of hours per week or having been an employee for a specified length of time.
Participants in a group plan may not be required to go through underwriting, the process that insurance companies use to assess how much of a risk a person poses when they apply for an individual policy. Instead, all eligible employees are automatically covered, regardless of their health.
Whether the employee is eligible to buy additional group term coverage also differs from employer to employer. In some plans, that is possible only when an individual is initially employed or after a qualifying event, such as the birth of a child. In other plans, supplemental group term coverage can be added during open enrollment periods.
Unlike basic coverage, supplemental coverage may require underwriting. Usually, it is a simplified underwriting process in which the employee answers some questions to determine eligibility rather than going through a physical exam. The insurance company then decides whether it will offer coverage and, if so, at what price.
Some employers give employees the option to buy a limited amount of group coverage for spouses and children (age eligibility for children varies).
Since a group term is linked to ongoing employment, the coverage automatically ends when an individual’s employment terminates. Some insurance companies do offer the option to continue coverage by converting to an individual permanent life insurance policy.
The conversion options vary from plan to plan, may not be automatic, and could require underwriting. The new policy may also carry a much higher premium.
Employers can provide employees with up to $50,000 of tax-free group term life insurance coverage. According to Internal Revenue Service (IRS) Code Section 79, the cost of any coverage over $50,000 that is paid for by an employer must be recognized as a taxable benefit and reported on the employee’s W-2 form as income. The taxable amount is calculated using an IRS premium table, based on the employee’s age, and is subject to Social Security and Medicare taxes.
If an employer does differentiate—which is allowed, by offering different amounts of coverage to select groups of employees—then the first $50,000 of coverage may become a taxable benefit to them. This includes corporate officers, highly compensated individuals, or owners with a 5% or greater stake in the business.
Group term life insurance is a good benefit to have, but there are some limitations to keep in mind.
Because group coverage is linked to employment, if you change jobs, stop working for a period of time, leave to open a business, or retire, then the coverage will stop. This puts you at risk of being uninsured or, if you have health issues, having difficulty with finding new coverage. You may have the option of converting to a permanent policy, but that can be costly.
Beyond that, the amount of coverage that your employer offers may not be enough to meet your loved ones’ financial needs after you’re gone. A basic $50,000 life insurance policy could pay funeral expenses and clear a few debts, but you’ll need a larger policy if you want to leave money behind to pay off the mortgage, put your kids through college, or cover your family’s day-to-day living expenses for years to come.
For those reasons, it often makes sense to buy some individual coverage on your own. Investopedia periodically rates the best life insurance companies for different types of policies.
You can get group life insurance if you belong to an alumni association, trade group, professional society, or other organization that offers group term life insurance for its members. And unlike employer-based insurance, group life insurance will be portable if you change jobs.
Having at least a small amount of life insurance can help pay your final expenses when you die. For example, if a parent co-signed for a student loan or car loan for you, then you might want to leave behind enough insurance to cover the payments.
A major reason permanent insurance is more expensive than term insurance is that permanent insurance has a savings component, often referred to as the policy’s cash value, while term insurance does not. You can access your cash value in your permanent life insurance and use the funds for other expenses.
Most insurance companies are backed up by state guaranty funds, which step in when that happens.
Death benefits paid to a beneficiary are not considered taxable income, so your beneficiaries will not have to pay tax on that money.