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Group Term Life Insurance Guide

Group Term Life Insurance

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Holly Johnson
Updated December 21, 2021
6 Min Read

Many employers offer numerous benefits to their employees, which can include anything from retirement plans to health insurance. Some employers also offer group term life insurance to their workers, which includes a death benefit their loved ones can use to fund a funeral or pay for other final expenses.

With this being said, group term life insurance works slightly differently than traditional term coverage people buy themselves, mostly because it's based on group participation instead of the individual. Further, the Internal Revenue Service (IRS) has several guidelines that determine whether this benefit is taxable.

If your job is offering group term life insurance and you're wondering how it actually works, read on to learn more.

What is Group Term Life Insurance?

Group term life insurance is a type of term insurance offered by employers to their employees. With this type of coverage, one contract is issued to cover multiple individuals — usually a group of employees that work for the same company. However, group term life insurance may also be offered to members of another type of group, such as a union or a membership association.

Generally speaking, group term life insurance is offered as a perk to recipients with no direct cost to them, although workers who receive this coverage through their employer may have the option to purchase supplemental life insurance coverage through work as well. 

How Does Group Term Life Insurance Work?

Group term life insurance policies are offered to employees or group members who meet eligibility requirements. In a workplace, this could mean reaching a specific employment threshold, such as a minimum of 90 days on the job. 

Employers or membership groups typically pay the premiums for group term life insurance. Because group term life insurance policies cover a group of individuals for a specific duration (i.e. years they work for a company) and because the death benefit for these policies is typically not very nigh, group term life insurance can be very affordable.

According to Northwestern Mutual, most group term life insurance policies come with a death benefit that is equal to one or two years of an employee's salary. Since most experts suggest having 10x your salary or more in term life insurance coverage during your working years, this means group term life insurance is likely insufficient to cover the average person's life insurance needs.

This reality, coupled with the fact that group term life insurance policies are tied to one's employment or membership, is why many people consider their group coverage as supplementary to other life insurance they have. 

What is Covered in a Group Term Life Insurance Plan?

Group members receive a certificate of insurance, and they get the opportunity to select the beneficiaries of their policy. This means that, just like with other term life insurance policies, beneficiaries get to decide how proceeds from a group term life insurance policy are spent in the event of death

The death benefit from a life insurance policy may be used to pay for final expenses, including a funeral and final disposition. However, life insurance proceeds can also be used to replace one's income for a limited time, to pay off debts, or for any other purpose.

There are an endless number of ways to use life insurance proceeds, but the decision is left squarely with the beneficiaries of a policy in the event of a claim.

Pros and Cons of Group Term Life Insurance

Group term life insurance has its advantages, but there are plenty of potential downsides for both the employer and the employee. 

Advantages of Group Term Life Insurance

  • Group term life insurance is typically free for the recipient. This type of life insurance is usually offered to employees as part of a benefits package alongside retirement benefits, health insurance, and other workplace perks. Workers typically do not pay any premiums for their group term life insurance coverage, although they may have the option to buy additional supplemental life insurance.
  • Group term coverage tends to be inexpensive. For employers, offering group term life insurance coverage is relatively inexpensive. This is true since a single policy covers a group of workers, thus spreading out the potential risks. The fact that death benefits for group term life insurance policies are low also keeps costs down.
  • No medical exam required. Where individuals typically need to go through a medical exam to purchase life insurance on their own, group term life insurance policies are offered automatically to employees and group members who meet requirements to qualify. This means someone in poor health can get group term life insurance coverage even if they can't qualify for their own policy.

Disadvantages of Group Term Life Insurance

  • Premiums aren't fixed for employers. Unlike traditional term life insurance policies, group term life insurance policies have rate bands that allow premiums to go up over time based on the ages of group members. This means the cost of this benefit is not fixed for employers.
  • Coverage is insufficient for workers. With the majority of group term life insurance policies providing a death benefit of $50,000 or $100,000 at most, this amount of coverage is not enough for the average person. 
  • Group term life insurance is contingent on employment or membership. Since group term life insurance coverage is tied to your job or a group you belong to, you can lose it overnight if you change employers or end your qualifying membership. This is yet another reason to purchase private life insurance with enough coverage to meet your needs.

Is Group Term Life Insurance Taxable?

According to the Internal Revenue Service (IRS), the first $50,000 of group term life insurance coverage provided by an employer is not taxable. However, they note that "the imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes."

In other words, premiums for group term life insurance coverage over $50,000 are considered a taxable fringe benefit. Further, this benefit is taxable even if the employees are paying the full cost they are charged. 

When it comes to group term life insurance coverage offered to a worker's spouse or dependents, a different rule applies. Per IRS regulations, the cost of premiums for a spouse or dependent paid by the employer is not taxable to the employee if the amount of the coverage is $2,000 or less. If the amount of coverage offered is worth more than $2,000, the IRS says the entire benefit is considered taxable income and not just the amount that is over $2,000.

On the other end of the spectrum, it's important to note that life insurance proceeds are not considered taxable income for beneficiaries. This means that, if a recipient of group term life insurance coverage worth $50,000 passes away, their beneficiaries can receive the full death benefit without paying income taxes on it.

Is Group Term Life Insurance Worth It?

Group term life insurance is definitely worth it for employees or group members who receive this benefit at no cost. For employers offering group term life insurance is a workplace benefit, having this coverage in place for employees can provide considerable peace of mind.

With all this being said, individuals should be careful not to rely on group life insurance as their sole source of life insurance. Since group term life insurance is tied to employment or maintaining membership in a group, this coverage can be lost if you switch jobs, you retire, or your company closes down or switches benefits plans.

Ultimately, individuals should look at group life insurance just like other benefits they receive from third parties. You can take advantage of workplace benefits when they're available to you, but you remember your situation could change at any time. With that in mind, group life insurance coverage should be considered supplementary to other types of life insurance you have, whether you purchase your own term life insurance coverage or permanent coverage such as whole life insurance.

Frequently Asked Questions (FAQ)

Can I get group life insurance from other sources than my employer?

In some cases, group life insurance is offered through union membership. You may also be able to qualify for group life insurance through groups you belong to, including various membership organizations. 

Who normally pays the premiums for group credit life insurance?

Most group life insurance plans are offered by employers. In this case, the company pays the premiums on behalf of their workers.

What are premiums for group credit life insurance based on?

Group life insurance premiums are priced based on a group of people instead of individuals. Generally speaking, pricing is offered in bands based on the ages of the covered group members.

Is group life insurance taxable to the beneficiary?

If someone dies and they have a group term life insurance policy in place, the death benefit is not taxable for the beneficiary.

Is group term life insurance subject to FICA?

According to the Internal Revenue Service, the first $50,000 of group term life insurance coverage provided by an employer is not taxable. However, amounts over $50,000 must be included in income and are subject to social security and Medicare taxes.

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