Many companies offer group life insurance as an employee benefit. Some of you may even forget having such a benefit through your employer. However, is it a good deal for everyone? This week I will give you some general guidance on determining whether you should opt-in this benefit.
Group life insurance offered through an employer typically includes two parts: basic coverage and voluntary/optional supplemental coverage. The employer usually pays for the basic coverage and the employee could purchase additional coverage often capped at multiple times of the employee's salary. The most common type of group life insurance is term life insurance which is the one I focus on today.
In general, I recommend most people to keep the basic coverage as long as you don't have to pay the premium as an employee. However, it can be beneficial for the people who currently do not have life insurance needs or just don't want life insurance to opt-out the basic coverage since it is not 100% free. Based on section 79 of the Internal Revenue Code, the imputed cost of group-term life insurance coverage over $50,000 must be included in taxable income and are also subject to social security and Medicare taxes. The taxable amount is based on the IRS Premium Table rates, not the actual premium cost, which you could find it in Publication 15-B. For example, assuming no exceptions apply here, a 30 years-old employee gets $200,000 basic group-term life insurance coverage through his/her employer. His/her income will be increased by $144 this year due to this free benefit. The potential tax savings by not taking the life insurance here is minimal. Yet I don’t recommend buying anything you do not need.
When it comes to whether you should purchase any voluntary/optional supplemental coverage, it mainly depends on your health condition. Compared to an individual one, the biggest benefit of the group life insurance is that you are guaranteed to get up to a certain amount of coverage you apply for. In other words, you could get some life insurance without submitting any Evidence of Insurability (EOI) like taking a medical exam or getting medical records. Obviously, the people who benefit from this the most are those who do not qualify for a better health rating with a lower premium through the normal underwriting process of an individual life insurance application. In contrast, people who are young and healthy are likely to get a cheaper or better individual policy than the group one. For example, a recent client of mine can get $500,000 optional life insurance coverage through her employer at the cost of $22 per month. She is 29 years old with perfect health. The cheapest individual term policy with the same amount of coverage for 20 years costs less than $18 a month. Also, unlike the individual level term policy, the premium of a group policy will increase once you reach the next age group, usually five years. For the same example above, my client is going to start paying an $25 per month for the next five years since she will be 30 years old in 2019.
If you read my previous blog post before, you may already know that the cheapest term policy may not always be the best. In the above example, the policy with the lowest price is not the one I would recommend to my client, but it is still a better policy than the group one in terms of cost and convertibility. In other words, even if an individual policy costs the same or even more than the group policy, it is still worth considering since it offers better conversion options and flexibilities. Group-term life insurance usually has strict limits on convertibility and portability.
In summary, I like the basic group life insurance since it is usually free or almost free and I am generally not a big fan of the voluntary/optional supplemental coverage for people who are young and healthy. In the end, what is the easiest way to figure out whether the group-term life insurance provided by your employer is a good deal for you? That is to compare the group policy with the best individual one available to you. And do not forget to consider other factors I mentioned above and in my previous blog post here when determining a term policy.