Friday, March 18, 2016

The Complete Guide to Group Term Life Insurance

Group term life insurance is a life insurance contract that is purchased by a group. Most employees are covered under some form of group life insurance but many aren't quite sure what they have or how it works. In this guide, I'll walk through everything you need to know about group term life insurance.

RESOURCE: If you need a refresher on how all life insurance works, start with The Definitive Guide To Life Insurance.

What Is A Group Term Life Insurance Policy?

Group term life insurance policies are special types of life insurance contracts. Instead of each member of the group having their own individual life insurance policy, there is one master group contract. It is usually owned by an employer group. Proof of coverage is usually in the form of a group certificate or enrollment confirmation form.

It's not unusual for employees to never see the underlying group term life contract that governs how the plan works.

If an employee dies, a death benefit is paid to whoever the employee named as their beneficiary.

Why Do Employers Offer Group Term Life Insurance?

Many employers offer some form of group term life insurance to help families have enough money for a funeral if the worst happens and an employee dies while they are employed with that company.

The amount of group life insurance that the employer pays for is a fringe benefit according to the IRS.

How Does Group Term Life Insurance Work? 

Once an employee becomes eligible for coverage, there's usually a short open enrollment time period to enroll on a guaranteed issue basis up to certain plan limits.

It's important to enroll during this time period to avoid having to answer any medical questions.

The main benefits of group term life insurance are:

  • The group negotiates with the insurance company on behalf of all its employees instead of each individual member having to negotiate on their own.
  • The group can sometimes negotiate lower rates or higher face amounts for its employees.
  • The group can negotiate a reduction or elimination of underwriting requirements based on the number of employees in the group and the number of employees that participate.
  • The group can payroll deduct any premiums required from an employee's paycheck and forward them on to the insurance company.

Because it's a form of term life insurance, that means it's only good for a certain period of time and then will expire at some point. This is usually when you leave the group.

Let's take a look at how group term life insurance differs from individual term life insurance.

The Differences Between Group Term Life Insurance And An Individual Term Life Insurance Policy

Group term life insurance policies differ from individual term life policies in several different ways. Those are:

  • There is no policy. All insurance is issued under a group certificate An individual covered under a group term life insurance plan does not get a policy.
  • It's an agreement between the group and the insurance company This means the insured has no control or ownership of what happens to the coverage under the plan.
  • Supplemental/voluntary group term life rates are usually age banded Group term life insurance rates are often age banded so that rates go up every five years. Individual term life insurance rates can be locked in for a much longer period of time. As you reach older ages the rates go up. This makes it more likely you'll start thinking about cancelling it.
  • Can be changed or cancelled at any time The group could decide to change insurance companies, contributions or cancel at any time and the employees have no say in that decision.
  • Usually reduces when you reach certain ages Once you reach ages like 65 or 70 years old, if you are still an employee of the group, the life insurance age reduction schedule will normally start decreasing your face amount.
  • Coverage can terminate when you leave the group When you leave the group, your coverage may end.

Group term life insurance is great because the group can often get you a good deal on term life insurance. But most likely you'll outlive the coverage.

The Four Types Of Group Term Life Insurance

There are usually four types of group term life insurance that you can obtain through a group. Here are the four types:

  1. Basic Group Term Life Insurance Basic group term life insurance is an employer paid fringe benefit that provides life insurance on an employee. Sometimes it includes a small amount of coverage on your spouse and children.
  2. Supplemental/Voluntary Group Term Life Insurance Supplemental/voluntary group term life insurance is additional amount of employee paid group term life insurance that the employee can purchase on themselves and a spouse.
  3. Dependent Child Group Term Life Insurance Dependent child term life insurance is insurance on your children in case something should happen to them.
  4. Accidental Death & Dismemberment Insurance Accidental death & dismemberment pays in an amount of life insurance in the event you die in an accident or a portion of the life insurance to you in the event of any dismemberment. Accidental death & dismember can be a standalone group offering and it could also be included as an enhancement to basic group term or supplemental term life insurance. In that case, it normally doubles the original amount.

These four types of group term life insurance are the most common offered in employer groups today.


Group term life insurance provides what can be an inexpensive and convenient way for employees to purchase life insurance.

But, even with a term conversion or portability option, more often than not, it will expire before the employees dies. So as good as it is, you'll most likely outlive it.

I hope that give you a better understanding of what group term life insurance is and how it works.

NOTE: You can read more about the downsides of group term life insurance in my post called Eight Problems With Group Term Life Insurance.

Let me know if you have any questions in the comments.

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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.