Group Term Life Insurance: What You Need to Know
Posted by Jennydsouza on December 16th, 2016
Group term life insurance is a benefit frequently offered by employers for their employees. Many employers provide their employees, at no cost, a base amount of group coverage as well as the ability to purchase supplemental coverage through payroll deduction. The plans may also offer employees the option to purchase coverage, through payroll deduction, for their spouse and children.
It’s really surprising how many people don’t understand and fail to integrate their employer-sponsored group benefits into their overall financial situation. Instead of just doing the same thing if changing jobs or each year when open enrollment comes around, you should take some time to think through your coverage options and determine the best strategy to meet your needs.
To help evaluate any group term life insurance coverage it first of all makes sense to determine:
If available, the coverage offered through a group plan varies widely among employers. The amount of coverage available may also differ depending on where you are in the organizational hierarchy. Benefits for management and executives may be more robust than the benefits offered to lower level or hourly employees.
As a starting point, it’s important to look at the group online term insurance plan document so you understand what amount and kinds of compensation are actually covered. Many group plans only cover your base salary. Other forms of compensation, such as a bonus, commission, reimbursement or incentive that is reported as income—for example an auto reimbursement or restricted stock award—could be excluded.
Group term coverage is generally inexpensive when you are young. However, the rates go up very quickly as you get older since the participants in a group online term insurance may not be required to go through underwriting. In a group plan all eligible employees are automatically covered, consequently, premiums are based on that pool of employees, regardless of their health. Most plans also have rate bands in which the cost of insurance automatically goes up in increments, for example, at ages 30, 35, 40, etc. The premiums for each rate band would be outlined in the plan document. So if you are in good health part of your premium could be helping to subsidize other employees who would might otherwise be rated or uninsurable; and who may also be getting a great deal. (For more, see: Getting Life Insurance in Your 20s Pays Off.)
Usually in group plans all employees are automatically enrolled in the base coverage once they meet the eligibility requirements. Requirements vary and can include working a certain number of hours per week or having been employed for a certain amount of time. The availability of supplemental group term coverage differs. In some plans it is only available when initially employed or upon the occurrence of life events, such as the birth of a child; while in other plans coverage can be added during open enrollment periods. Supplemental coverage may require underwriting. Usually it is a simplified underwriting process in which you answer some questions to determine eligibility, rather than having to go through a physical exam. The carrier then decides whether or not they will offer you coverage.
Additionally, some plans offer the option to purchase permanent coverage with simplified underwriting and may let the employee buy a limited amount of group coverage for their spouse and children (age eligibility for children varies). Underwriting is usually not required.
Portability of Coverage
Since group term is linked to your ongoing employment the coverage automatically ends when your employment terminates. Some insurers do offer the option to continue the coverage by converting the group term to an individual permanent policy. The conversion options vary, may not be automatic, and could require underwriting. Consequently you could be rated and offered a policy with a much higher premium. Also, the policies available when converting may be limited and are not always the most competitive products.
Taxation of Benefits
As a benefit employers are allowed to provide employees with ,000 of tax-free group term life insurance coverage. According to IRS code section 79 any amount of coverage above ,000 that is paid for by your employer has to be recognized as a taxable benefit and included on your W-2 as imputed income. The taxable amount is calculated using the IRS Premium Table and is subject to social security and Medicare taxes. (For more, see: How Life Insurance Can Help Reduce Estate Taxes.)
If an employer does discriminate, which is allowed, by offering different amounts of coverage to select groups of employees the first ,000 of coverage may become a taxable benefit to certain employees (corporate officers, highly compensated individuals or owners with 5% or greater stake in the business).
Also, how a business is organized may affect the taxation of benefits. Online term insurance participants who own more than 2% of an S corporation, are partners or a sole proprietor and are not considered employees. Any premium paid for their group term insurance is generally not tax deductible. In a C corporation, premiums paid for all employees, including the owner, are usually tax deductible.(For more, see also: Starting a Small Business: Business Structures.)
The Bottom Line
Group coverage is linked to your ongoing employment. If you change jobs, decide to stop working for a period of time, leave to open your own business or retire, the coverage will stop. This puts you at risk if you have health issues and a new employer offers different benefits or if you are not working. If you need to maintain the coverage you could be forced to convert the group term to a permanent policy. Or you could be left without any coverage.
Group coverage also becomes more expensive as you get older. If you are healthy you may be able to buy a 20 or 30-year level term policy today that locks in the coverage at lower cumulative cost. In addition, owning an individual policy ensures you will never be without coverage or forced to buy a more costly policy later in life. If you do buy an individual policy be sure to purchase one that offers a conversion option.
There are many pros and cons to group term coverage. Understanding your insurance needs and goals in life can help you make an educated and financially sound decision.
Source: http://www.investopedia.com/articles/personal-finance/122315/group-term-life-insurance-what-you-need-know.aspTop Searches - Trending Searches - New Articles - Top Articles - Trending Articles - Featured Articles - Top Members
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