Should I Buy Group and Supplemental Life Insurance?
Organizations and employers frequently provide group and supplemental life insurance as a member or employee benefit.
Even if you have adequate individual coverage, you should take advantage of any free group life insurance offered by your employer.
We would not recommend purchasing supplemental life insurance if you are relatively healthy and can qualify for reasonable rates elsewhere. Supplemental life insurance is typically only a good option if you have pre-existing conditions or are unable to purchase an individual term life insurance policy for some reason.
What is group life insurance?
Group life insurance is simply life insurance provided to a group of people by an organization. Though life insurance is provided by an organization, you have the option of selecting the beneficiary, who can be your spouse, child, or any other loved one. You may be able to obtain group life insurance through:
- If you served in the armed forces, contact the United States Department of Veterans Affairs.
- An organization such as the AARP
- Your church
- Your employer, whether they're private or part of the government
Your employer's group life insurance will typically be provided as a multiple of your salary and will have two types of coverage: basic and supplemental.
- Basic group life insurance is the amount available to you as an employee benefit at no cost. We recommend that you enroll in any amount of basic group life insurance offered, as it provides additional financial protection to your family without requiring you to pay premiums.
- Supplemental group life insurance is any amount of additional coverage you purchase through your employer.
The association or your employer is essentially the policyholder because the organization purchases group life insurance from the insurer. As a result, if you change jobs or stop paying dues, you may lose access to life insurance coverage. Furthermore, the amount of insurance you can purchase may be restricted.
However, basic group life insurance is usually a guaranteed issue, which means you won't be denied coverage because you're sick or a smoker. This can be extremely valuable if you're older or would have difficulty covering the cost of insurance elsewhere, as coverage can become prohibitively expensive if you're not in good health.
What is supplemental life insurance?
Supplemental life insurance, also known as voluntary supplemental life insurance, refers to any group life insurance you purchase in addition to what your employer provides. Typically, payments are handled by your employer, who deducts the premiums from your paycheck. You may be able to purchase supplemental life insurance for yourself, your spouse, and your children, depending on the insurer with whom your employer works.
The decision to purchase supplemental life insurance through your employer is primarily determined by your health. Simply put, if you're young and healthy, you're more likely to get better rates when purchasing an individual life insurance policy (which also provides more options for coverage). Supplemental life insurance, on the other hand, should be purchased if you require more life insurance than is provided by basic group coverage and have had difficulty getting approved for an individual policy.
Because the insurer knows so little about your health, supplemental life insurance premiums are higher. As it is not a guaranteed issue like basic group life insurance, they may require "evidence of insurability" if you want to purchase a large amount of coverage. Answering health questions, allowing the insurer to review your medical records, or submitting to a medical exam can all be used to demonstrate insurability.
While you can typically buy significantly more supplemental life insurance than your employer provides as basic group life insurance, the maximum is usually lower than what you could buy through an individual policy. Furthermore, the amount of supplemental coverage available to your spouse is usually fixed as a percentage of your coverage or a specific dollar amount.
Types of group life insurance policies
Group life insurance is typically provided in the form of annually renewable term life insurance, which means that coverage will expire within a year of leaving your employer or organization. Premiums paid by your employer, or by you if you purchase supplemental insurance, are primarily determined by your age group (such as 30 – 34 or 35 – 39). Some insurers, such as MetLife and Prudential, provide additional types of group life insurance for businesses. Group universal life insurance, whole life insurance, and accidental death and dismemberment insurance are all examples of this.
- While basic group term life insurance usually ends when you leave your job, supplemental coverage and permanent policies may be portable. If you decide to leave the company, you will be given the option of converting your coverage to an individual policy with the same terms. Though the option of conversion is usually guaranteed, regardless of your health, it also means that your premiums will be significantly higher than if you simply purchased an individual policy if you're in good health.
The decision to keep your group life insurance coverage when leaving an organization is influenced by your policy and health.
- If you're relatively healthy or young, you should compare rates from multiple insurers because you're more likely to find lower quotes for comparable coverage.
- If you had term supplemental insurance and would have difficulty finding comparable rates elsewhere, you should convert your policy.
- If you had permanent group insurance, you must determine the cash value of the policy and review the terms of your contract. Because permanent policies are costly, keeping the coverage may not be the best option — even if you're healthy and the policy has a significant cash value.
Taxes on group term life insurance
When you die, your beneficiaries, like those of an individual life insurance policy, will not have to pay income taxes on the death benefit of the policy. However, you may be required to pay taxes on the value of your group and supplemental life insurance because it is considered income.
If you have less than $50,000 in group and supplemental term life insurance through your employer, you will not be subject to any income taxes. The IRS assigns a fair market value to any group term coverage valued at more than $50,000. If you pay less in premiums than the fair market value, the difference is considered income and you must pay taxes on it.
- Assume you're 50 years old and have $150,000 in combined group and supplemental life insurance through your employer, with $100,000 of that being supplemental coverage. After deducting $50,000, the amount of coverage to be assigned fair value is $100,000. A 50-year-old would be assigned a monthly value of 23 cents per $1,000 of coverage, giving your life insurance a total fair market value of $230 per month. If you already pay $200 per month for supplemental coverage, you would be considered to have an additional $30 per month in taxable income.
It may appear strange to pay taxes on coverage that you already have. A fair market value is assigned to compensate for situations in which an employee receives significantly reduced premiums due to their risk being pooled with healthier people.
There are a few exceptions to this rule. If your spouse or children have more than $2,000 in life insurance, the total cost of their coverage may be taxable income. Furthermore, if the company provides different levels of life insurance to different groups of employees, you may be required to pay taxes on the full cost of coverage if you are an officer or significant owner of the company.