Group life insurance: What is it & is it enough?

Employer benefits are a great starting point for understanding insurance protections—often provided at no cost to employees. From disability to health insurance, basic coverages available through employers often form the foundation of a new worker’s financial security plan.

However, as you grow your financial knowledge, you may wonder whether group life insurance offered by your employer is right for you and whether it offers enough protection. Let’s explore how group life insurance works, how much it can cover, how it impacts taxes and when you might want supplemental coverage. 

Group life insurance is a contract offered through an employer or organization to a group of employees or members that provides a death benefit if you die during your employment.

These contracts tend to look a bit different from individual life insurance:

• Simpler setup. Underwriting tends to be simpler for the employee than for an individual pursuing a stand-alone life insurance contract. You most likely won’t need to have a medical exam in order to qualify for your group life insurance contract.
• Lower coverage. Coverage can be available at lower amounts than most individual contracts will offer, and the corresponding premiums are generally quite low as well. These premiums even may be partially or fully covered by the employer themselves.

Employers may offer both term and permanent group life insurance, though most plans are structured as term coverage tied to your employment period. Term coverage is for a specific period of time, as opposed to permanent life insurance. In group life insurance, the term is usually restricted to when you’re employed by the company, meaning you lose that coverage if you leave the company.

Employers offer this benefit as part of their overall efforts to recruit and retain employees, and as a basic form of financial protection for the families that rely on an employee's income. 

Group life insurance typically provides modest coverage linked to your income—often 1 to 2 times your annual salary—which may fall short of long-term family protection needs. Often, when you enroll for benefits, there may be an automatic component of the registration with the option for additional voluntary coverage at an additional premium amount that you’ll pay yourself.

Frequently, the payment for these contracts will just come out as an automatic deduction before you even see your paycheck, which many people find to be a convenient way to add a life insurance product into their lives without needing to handle a separate bill. Your employer may offer some coverage level for no cost to the employee, making it a valuable resource without a financial downside.

Insurance is always priced and calculated through managed risk, and group life insurance spreads out risk across many members. This is how these contracts often won't require a medical exam to qualify, while individual life insurance contracts often have a medical exam as part of the underwriting process.

Employees who have had life insurance offered at multiple employers over the years may not think about the fact that their coverage wasn’t portable. Typically, the most hands-off version of this is that the employee accepts an automatic basic coverage, whatever the lowest coverage limit is, while enrolling for benefits.

Frequently, during enrollment, there are options to pay a slightly higher premium and enroll at a higher coverage limit, but these options are usually limited in scope.

When you leave an employer, your HR department may mention conversion options. Conversion would mean working with the insurance provider to convert your current group insurance coverage to a stand-alone contract that is portable, or able to go with you as you leave your employer. This isn't always available, so if conversion isn't possible, your group life insurance would end when your employment ends. Even if a future employer offers group life insurance, many people choose supplemental life insurance as a way to ensure they're covered to their desired level and between jobs.

Employer-provided coverage up to $50,000 is typically excluded from taxation, but coverage above $50,000 may be taxed as imputed income. The IRS has rules regarding the tax liability generated by various employer-offered benefits. They have a table on their website that can help you understand the cost of coverages provided by your employer above the $50,000 limit. 

For instance, let’s say that you are 40 years old and your employer’s group term life insurance has $150,000 in coverage. You’d look at the chart (on page 15 of the IRS publication's current edition), where you'd see that the cost per $1,000 of protection for someone who is your age is $0.10 currently for a single month. You’d then calculate the imputed income of that additional coverage based on just the amount above $50,000 (in this case, $100,000):

$0.10 x 100 = $10 a month, or $120 yearly

If this coverage were provided with no employee-paid premiums, you’d have a $120 tax liability for this coverage, though you would reduce it by the amount of any premiums you paid for that level of coverage. Keep in mind that you wouldn't typically have to calculate this yourself; it would appear on your W-2 if it applies to you.  

In general, group life insurance may not be enough to cover the obligations that many people want to cover with a death benefit. Every person determines how much is "enough" life insurance differently, but let's look at how you can evaluate how much life insurance you personally want to have.

A key distinction between group life insurance being enough and needing supplemental life insurance coverage is what age and stage you're at in your life. What you want in a death benefit when you're young and single may be very different from your preferences and needs once you find a partner, have children and take on various financial obligations like a home mortgage.

For families with dependents—such as a spouse or children—group life insurance alone is often insufficient to cover major financial obligations like a mortgage or childcare. This is why many choose to supplement their employer-sponsored contract with an individual life insurance contract.

Why consider supplemental life insurance?

Individual contracts can provide more coverage, which can help make many things easier if you die unexpectedly. Benefits can help:

• Pay down debt obligations (student loans, mortgage, credit card debt)
• Pay funeral/burial expenses
• Fund the household's lifestyle at its previous level of expected income

A typical group life insurance benefit can provide short-term financial relief, but it rarely replaces income or secures long-term goals like debt repayment and education funding. However, as obligations grow and some families rely on a single income, many people find that the additional protection of supplemental coverage gives the extra padding needed.

For instance, joint life insurance may be an appealing option for spouses who want a single premium but a benefit in the event that either of them dies unexpectedly. This customization is usually not available with a group life insurance contract through your employer.

How to decide if you have enough coverage

Several factors play a part in what your coverage should be. Consider questions like:

• How much income do I want my life insurance to replace?
• How quickly would savings be depleted if my family suddenly lost my income?
• How large is my family, and what financial responsibilities would I want my life insurance to be able to defray?
• Can my group life insurance be converted if I switch jobs? Am I likely to switch jobs during the coming years, resulting in the loss of this group coverage?

As you decide whether to increase life insurance coverage through supplemental insurance, consider other elements of your financial picture, such as savings or assets that could be helpful to your family in the event of your death. The whole financial picture matters when deciding if group life insurance is enough.

Many of the benefits of group life insurance revolve around it being a good way to start protecting your income and your family’s financial security. Several drawbacks are associated with the limits of this coverage compared to stand-alone coverage. Group life insurance has a valuable place in your financial picture as long as you also consider when you might be a good candidate for stand-alone supplemental life insurance.

• Inexpensive or free coverage: At times in your life when you might not otherwise have any life insurance, group life insurance can be a wonderful place to start, especially when an employer is covering all premiums for a certain amount of coverage. Taking advantage of this coverage is part of really understanding your benefits package and making sure you maximize the benefits you have.
• Easy to access: Due to the structure of group life insurance, it usually doesn’t require a medical exam, which may be needed to underwrite an individual stand-alone contract. This ease can make it a great fit for those who worry that a medical exam would drive up their premiums or reduce their eligibility for life insurance. 
• Automatic enrollment: When a benefits plan automatically connects you to a group life insurance contract, it’s one less bit of paperwork you need to do to bring more stability to your financial life.
• Basic protections: The benefits of even a small group life insurance death benefit are undeniable, as beneficiaries will be grateful for that immediate payout that can aid with expenses and the loss of an income. 

• Coverage limits: Most group life insurance contracts have coverage limits even for the supplemental add-on coverage, which may be lower than your preferred amount of long-term coverage.
• Lack of portability: While some contracts can convert to individual stand-alone contracts, group coverage often ends when you move on from that employer, requiring a new, different contract if you want to continue to have life insurance coverage.
• Fewer options for customization: When writing an individual insurance contract, companies often offer riders and additional structures/opportunities that aren’t available through an employer’s contract.
• Potential tax implications: When coverage exceeds $50,000 (or other IRS thresholds down the road), the contract’s imputed income value may be taxable.  

It’s wise to consider what you want from life insurance beyond what is available through your group insurance plan. You deserve to customize as you see fit, if you determine that you want more or different coverage. As you go through life’s phases, you may hit new milestones—like getting married, having a child or purchasing a home with a mortgage—that change your preferences when it comes to financial protection.

To maximize your group life insurance benefits while also making sure your coverage fits your needs, consider these best practices:

• Review regularly. Review and adjust the coverage, both costs and limits, as your family grows or your debt and other financial obligations change.
• Shop around. When you price out additional coverage, you don’t have to limit yourself to employer-sponsored coverage. While supplemental coverage would need to be paid out-of-pocket to another provider, you’ll be able to actually compare the value of what you’re getting versus the premiums charged, rather than being locked into a single option.