Group life insurance is often offered to employees as an employee benefit. It serves as both an employee retention tool and a way provide employees some peace of mind for their families.
There are various avenues for funding these group plans, and different underwriting criteria that can either reduce or increase the premium amounts. In most cases, life insurance face amounts will vary from policy to policy and will usually be based in part on each employee's base salary.
Employers often provide group term life insurance to their employees at no cost to the individual, usually with a benefit equal to a percentage of base salary.
Internal Revenue Code Section 79 governs the taxation of this employer-provided life insurance. An employee can receive up to $50,000 worth of coverage tax-free. The cost of any insurance above $50,000, less any amount paid for the insurance by the employee, is taxable income to the employee.
Types of group life insurance
There are three different categories for group life coverage:
Guaranteed underwriting - Automatic enrollment is granted to all eligible employees who apply. But they must meet eligibility requirements that the employer and insurance company negotiate.
Guaranteed underwriting requires little paperwork, there is no medical exam and it is issued quickly. It is usually only provided for large groups where employees cannot be denied.
To qualify for guaranteed issue, employers usually agree to a minimum percentage enrollment.
Simplified underwriting - There is no blood test or urine test, and no medical exam is required. Each applicant usually answers several health-related questions in addition to agreeing to a medical record background check.
Full underwriting - Full underwriting is usually required with small groups, with individuals, or on larger face amounts. Medical exams are typically required, and a full examination is taken to satisfy the full records check requirement.
With full underwriting, it takes longer to complete the application process and not all people will qualify.
Why offer group life?
An employer group is at an advantage over an individual because it can use the group's buying power to negotiate a guaranteed issue life insurance offer for their employees. This would allow individuals who wouldn't qualify on their own for insurance an opportunity to get it through their employer.
Premiums are typically low and that's why employers will often offer this benefit at no cost to the employees.
It's also a great selling point when attracting new talent and retaining your employees.
Group life also benefits those employees who otherwise would not purchase life insurance on their own, either because of apathy or they may not be able to afford individual life insurance policies.
It also allows higher-risk individuals to be given life insurance coverage where they may have a harder time obtaining coverage on their own.