Monday, February 22, 2016

How Does Basic Group Term Life Insurance Work?

Basic group term life insurance is a fringe benefit that employers provide to their employees. It's an amount of life insurance that employees get just for being an employee of the company. It covers all eligible employees under a group certificate owned by the employer that outlines what the life insurance coverage is and how it works.

Typically, basic group term life insurance is offered in one of three types of amounts. They are:

  1. Flat Amount This amount might range between $5,000 to $50,000 but in some cases might be higher. For example, a company might offer a flat amount of $20,000 of life insurance for all eligible employees.
  2. Graded Benefit Amount This is a flat amount of life insurance for different classes of employees. Each class would have a "graded" benefit based on the type of employee they might be. Class 1 employees might receive $20,000 and Class 2 employees might receive $50,000 as an example.
  3. Multiple of Salary Amount Each employee would be offered a multiple of salary as their "flat amount". This amount might be 1, 2, 3 or some other multiple of the employee's salary rounded to a certain amount. An employee who has a salary of $32,000 might receive an amount of basic group life insurance equal to 1 times their salary rounded to the nearest $5,000 and receive $35,000 of group life insurance.

As part of the basic group life insurance, the employer might add a few additional optional provisions as part of the basic group life insurance to enhance it.

  • Waiver of Premium This protects employees basic group life insurance in the event that an employee becomes totally disabled while covered under the plan.
  • Accidental Death & Dismemberment This provides an additional payment in the event that an employee dies in an accident or loses certain body parts.
  • Basic dependent life insurance Some companies provide a small amount of life insurance for spouses and children as part of their basic group term life insurance.

Usually the employer pays the entire cost of the premium of the life insurance. However, it is also possible that the employee might be required to pay a nominal amount of the basic life premium in certain instances either for themselves, for their basic dependent life coverage or for both.

Exclusion from wages.   You can generally exclude the cost of up to $50,000 of basic group-term life insurance from the wages of an insured employee. You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. In addition, you do not have to withhold federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee.

Since basic group life is almost always provided free to the employee, employees like and appreciate the basic group life insurance that might be provided. Many employees rely on the basic group life insurance as their only life insurance program and therefore overlook or are unaware of some of the problems with group life insurance.

But, because the employer owns the contract, the employer also controls it. It is completely up to employer to decide the amounts and features offered under a basic group life insurance. This means that the plan can be changed or modified from year to year as the employer sees fit. While it's rare, I've even seen a group totally do away with their basic group term life insurance program.

The reality is that most people outlive their basic group life insurance and then when they need it, they don't have it anymore. They often change jobs and eventually retire. Once they are no longer a member of the group, they lose their coverage. While some basic group life insurance might provide a convertibility option, most people don't exercise it.

In addition, if an employee works for an employer long enough, the basic group term life insurance face amount starts to reduce at older ages. This reduction normally begins at ages such as 65 or 70. The age reduction schedule will vary from plan to plan.

Of course, because it's group insurance every feature of the plan could be different from company to company so in order to see exactly how a plan works, you have to review the plan documents.

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Michael is a champion of guaranteed issue for employees in the workplace. He's been an insurance agent since 1992 and has worked with thousands of employees.