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Group life insurance is a type of life insurance where a single contract covers an entire group of people. This type of life insurance is usually negotiated by an employer with an insurance company and offered to employees as a part of their benefits package.
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If you’re employed, there’s a high likelihood that group life insurance is offered by your employer at little to no cost to you. Professional associations may also sponsor group life insurance as a benefit for their members. When you start a new job, or join a new association, there may be a waiting/participation period before you’re able to sign up for benefits, including group life insurance. This is a normal requirement. When you sign-up, there will be a few required forms like accepting the terms and naming your life insurance beneficiaries. It’s a pretty standard process that doesn’t require a lot of time, and also does not require a medical exam.
Groups are able to get a good rate because they are “buying in bulk”, for a group of people in contrast to an individual rate one person might pay. But, coverage amounts are usually much lower than an individual policy, often capped at $50,000 or one to two times your annual salary amount. While this can provide some coverage for very little or no cost to you, it probably won’t be enough coverage to provide income for your family should something happen to you, which is what life insurance is really all about.
Additionally, most group life insurance coverage is based on term life insurance. As with all term life insurance, this means that your beneficiaries will only receive your death benefit if something happens during your coverage period, and you won’t be accumulating any cash value. When you leave the group, you may have an option to convert your group coverage to individual coverage but it will usually be more expensive, especially if you have health issues at that time.
To be eligible for group life insurance, you typically need to be actively employed by the company providing the policy. Eligibility criteria may include a minimum number of work hours per week for some policies, whereas others may be accessible to all employees, irrespective of their employment status.
Employers often cover all or part of the premiums for group life insurance. If employees are required to contribute, this amount can be deducted from their paychecks. The premium you pay may vary based on factors like age, salary, and smoking status. Employers might offer various coverage levels at different costs, allowing employees to select the amount of coverage that suits their personal needs and financial situation.
The price of group life insurance can differ based on several factors, including the employer, the insurance company, and the group’s demographic characteristics, like the average age of the workforce. Generally, the cost of group life insurance obtained through an employer tends to be relatively low.
There are several methods to determine benefits in group life insurance, with some of the most common types described below.
In these plans, the death benefit is linked to a multiple of your salary. For example, it might be twice your annual income. This linkage means that as your salary increases, so does your coverage level.
These plans adjust the death benefit based on your earnings at specific levels. For instance, the benefit might equal your annual salary if you earn below a certain threshold, or it might be twice your salary if your earnings exceed that threshold.
Under these plans, all employees receive a uniform death benefit, regardless of salary. Common payout amounts range from $10,000 to $25,000.
In these plans, the payout varies based on factors like your salary and duration of employment, offering a more customized approach to benefits.
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While group life insurance might not cover all the bases when it comes to providing for your loved ones and building a financial legacy, there are some advantages to getting this coverage through an employer.
Getting group life insurance is often as easy as filling out a few forms as a part of your hiring process or during an open enrollment period.
The basic coverage is often free for an employee in an employer-sponsored plan. This employee benefit is an easy way for an individual to get some life insurance coverage for little or no cost.
Typical group life insurance plans offer guaranteed coverage as long as you’re part of the group. This means employees with or without serious medical conditions can take advantage of the coverage.
These three benefits are why so many people take advantage of group life insurance. It usually makes a lot of sense to accept group life insurance coverage, but don’t stop there.
Depending on your financial and long-term goals, group life insurance will most likely fall short of the total life insurance coverage you need. Here are some common disadvantages of group coverage.
Group life insurance is often tied to your employer. This means that if you were to change jobs, your life insurance coverage wouldn’t follow you. In some cases, you may be able to convert your policy to individual coverage when you change jobs, but the cost of premiums could go up significantly.
Group coverage amounts are typically lower than an individually-owned life insurance policy. Most group policies are capped at $50,000 per employee or one or two times your annual salary. This means that your beneficiaries may only receive enough money to replace your income for a couple of years.
Because group life insurance is a “one size fits all” life insurance plan, you might be paying more than necessary for your group coverage, especially if you’re young and healthy. Insurance companies charge a median rate because they know some people in any given group will be at higher risk and some people will pose a lower risk. This is usually cheaper for the employer as a whole, but if the employer isn’t paying 100% of the premiums, your share might be more than you would pay for individual life insurance coverage.
Group coverage options are negotiated by the employer. Because of this, you aren’t able to explore the variety of policy options and rates that would be available to you outside of work-provided coverage. This means that your group coverage isn’t tailored to you and your specific needs and goals.
Group life insurance serves as a source of reassurance for employees and their loved ones, providing a sense of financial security in the event of the employee’s death. This type of insurance is commonly offered by businesses as a benefit to attract and retain skilled workers. It demonstrates the company’s commitment to valuing and prioritizing the well-being of its employees.
For families facing financial challenges, group life insurance can offer crucial support. However, it’s important to recognize that this form of insurance may not be comprehensive. Often referred to as supplemental life insurance, group life insurance is intended to augment personal life insurance policies, offering additional coverage rather than serving as the primary source of life insurance.
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It’s often a good idea to take advantage of group life insurance coverage, especially if it’s free through your employer. However, this isn’t where your life insurance coverage should stop. Most people need more than just group coverage.
At McFie Insurance, we specialize in designing individually-owned term life insurance and participating whole life insurance policies to fit your needs.
Individually-owned term life insurance can provide larger amounts of temporary life insurance for a relatively low premium. Whole life insurance can take advantage of guaranteed cash value growth and potentially dividends (unlike term insurance). Cash value growth within a whole life insurance policy is tax-deferred and can offset the cost of insurance over time. Whole life insurance can be a great tool for building wealth and a long-term financial legacy. All individually-owned life insurance will follow you regardless of employment changes.
If you’re interested in getting more than just group life insurance to build and protect your finances, schedule a strategy session with us today.
by Gracine McFie
There are many ways to access information about finances, but it can be hard to determine which sources are trustworthy. I like to put information together in an accurate, straightforward, easy to understand manner so people can make good financial decisions based on the information provided without having to waste time wondering if the source is reliable.
