Group-Term Life Insurance Guide
Group-Term Life Insurance Guide
What Is Group-Term Life Insurance?
Group-term Life (GTL) insurance plans are a popular benefit provided or offered by a vast majority of employers1 to their full-time employees. GTL provides income and asset protection to a covered employee’s survivors in the event of the death of the employee during the years the insured is actively employed.
Depending on the plan, additional benefits such as accidental death and dismemberment, spouse and dependent life insurance coverage, accelerated death benefits and disability premium waivers may also be included provisions under a GTL policy. Often, group-term life insurance carriers will also provide additional value-added benefits to covered individuals for no additional cost. These additional benefits are discussed later in this guide.
There are many advantages to employers who offer or provide group-term life insurance to employees. For example:
- Spouse and dependent life insurance coverage may also be available to covered employees under the GTL plan.
- The cost for the insurance is generally affordable due to the spread of risk over the entire insured population, based on the group’s demographics and carrier book-of-business blended with plan experience.
- Premiums can be paid by the employer under a non-contributory arrangement (referred to as “basic life” insurance), employers and employees can share in the cost or the plan can be totally voluntary (premiums are fully paid by employees). Employees can be offered an option to purchase additional coverage to supplement an employer-paid life insurance benefit. Pooling of risk generally means that the cost of coverage is less expensive than premiums paid for individual term life insurance policies.
- Often, coverage is provided on a guaranteed issue basis, which means there is no medical underwriting if individuals enroll in coverage when they are first eligible. However, if benefits elected by an employee exceed the guaranteed limits, coverage is subject to evidence of insurability (EOI) and underwriter approval. Until the underwriting decision is received, employers will want to be cautious about deducting premiums that exceed the premiums applicable to the guaranteed issue limit from employees’ paychecks to avoid any potential liability for claims if EOI (showing the individual was insurable at the time of application) has not been received by the insurer.2
- Employers can deduct the amounts they pay for GTL from corporate taxes, and benefits paid to survivors are not taxable. Special rules apply with respect to the taxability of employer provided life insurance for covered employees. See the section titled “Taxation of Employer-Provided Group Term Life Insurance” for specific details.
How Much Group-Term Life Coverage Is Generally Provided?
Basic Life Insurance:
Employers can determine the amount of employee basic life coverage based on a multiple of earnings (e.g., one to five times covered annual earnings) or a flat dollar benefit.
- When the scheduled benefit is a multiple of earnings, generally, coverage is capped at a specific dollar level for employees whose benefit would otherwise exceed that amount.
- For example, an employer might adopt a basic life schedule of 2X annual earnings capped at $200,000. An employee earning more than $100,000 would be covered at the $200,000 maximum.
- Generally, the basic life insurance coverage is offered on a guaranteed issue basis.
- ADEA-permitted age reductions3 may apply. For instance, a policy might reduce a benefit to 65% of the original benefit at age 65, 50% at age 70 and 35% at age 75 or older.
- Example: The employer purchases basic life insurance coverage of $200,000 for an employee. When the employee reaches age 65, his coverage will reduce to $130,000. At age 70, his benefit is $100,000. At age 75 or older, the employee receives $35,000 in life insurance coverage.
- Typically, the scheduled benefit is rounded to the nearest or next higher increment of $1,000.
- Example: An employer provides a benefit of 1X annual salary. Their employee earns $76,232 in annual base earnings. The employee receives coverage of $76,000 if the schedule rounds to the nearest $1,000 (or $77,000 if the scheduled benefit is rounded to the next higher $1,000).
1 Per the International Foundation of Employee Benefit Plans (IFEBP) 2022 Employee Benefits Survey, 93.8% of corporations and 96.1% of public employers offer group-term life to salaried employees. For hourly employees, 83.4% of private corporations and 76.5% of public employers offer group-term life insurance.
2 In April 2023, the DOL reached a settlement with Prudential whereby Prudential agreed to voluntarily reprocess claims and pay death benefits going back to 2019 that were previously denied for failure to submit EOI when premiums were paid for one year or longer. In addition, the settlement prohibits Prudential from denying future claims when the employee has paid premiums for a period of more than three months (in cases where premiums were paid for less than three months prior to the death, Prudential agreed to return the premium overpayment to the beneficiary with an explanation of why the excess claim was denied). Under the settlement, the insurer must “work with the employer and the employee or eligible dependent to affect the proper submission” of EOI. See the DOL News Release regarding the settlement for more details. The DOL states in the News Release that they “would urge all insurers to examine their practices to ensure that they aren’t engaged in similar conduct.” Furthermore, the settlement noted that if employers sponsoring life insurance plans collect premiums from employees “for the supplemental portion of the insurance without first confirming that [the insurance carrier] has approved that employee’s or eligible dependent’s EOI, the [employer] may be liable to the beneficiaries of said employee or their eligible dependent.”