Deborah teaches college Accounting and has a master's degree in Educational Technology and is holds certifications as a CIA, CISA, CFSA, and CPA, CA.
We can purchase life insurance individually or as part of a group plan. In this lesson, you'll learn more about what group life insurance is and the types of group life insurance offered.
What Is Group Life Insurance?
Let's meet Ms. B. Prudent, who just started a new job at the Whimsical Toy Company. As part of her offer package, she received information about the company's group life insurance plan. She doesn't know much about life insurance, and she is overwhelmed by the amount of paperwork her new employer has provided. Let's see if we can help Ms. Prudent with this decision.
Employers usually offer group life insurance to their employees as part of a benefit package. It provides life insurance coverage at a much lower cost than if the employee were to purchase the coverage individually. Employees may have to pay for their monthly insurance premium (or the cost of the policy) or the employer may pay for the policy. An employer who purchases the policy for its employees owns the policy or master contract. Employees who sign up for group insurance coverage are issued a certificate for the amount of coverage that they have.
Types of Group Life Insurance
There are two types of group life insurance, specifically:
In a contributory group life insurance policy, employees pay some of the premium for the policy and the employer pays the balance of the premium. Since the employer and the employee are sharing the cost of the contributions, employees usually receive more coverage than they would be able to secure if they were getting an individual insurance policy. In most cases, companies issue contributory group life insurance plans automatically to employees without requiring the employee to submit to a physical or medical examination.
Since employees have to pay for a portion of the policy premium from their after-tax earnings, there is a possibility that employees will choose not to participate in the company's program. Another disadvantage of contributory group life insurance plans is that employees usually have limited choice regarding the amount of coverage that they can obtain through their employer.
In a non-contributory group life insurance policy, the employer pays all of the policy's premium and the employee doesn't contribute any money. This type of policy allows all employees to obtain insurance coverage and the employer has much less paperwork to complete as it doesn't have to track individual employee contributions.
A non-contributory plan usually doesn't cover as much as a contributory plan. The employee may also have a taxable benefit, which is an amount added to his/her annual earnings for the amount of the premium that the employer pays for the policy on his/her behalf.
Ms. Prudent will need to determine if her new employer is offering a contributory or non-contributory group life insurance policy. If the policy is contributory, she needs to determine if she is willing to pay part of the premium for her insurance coverage. She should also review how this coverage would fit with any other individual insurance that she may already own. If the policy is non-contributory, she will need to determine whether or not the policy provisions suit her insurance needs.
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Many group life insurance contracts contain a conversion privilege clause that allows the employee to convert his/her group coverage to an individual insurance contract if he/she leaves the company for another job. The employee does not have to undergo a physical or medical examination to qualify for the individual coverage, and they can take the coverage with them without having to re-qualify. Companies that offer a conversion privilege usually provide their employees with 31 days after termination of employment with the company to exercise their conversion privilege.
While this provision is nice to have, Ms. Prudent would not be under any obligation to convert her group insurance coverage to an individual policy if she decides to leave the Whimsical Toy Company. It is always good to have options in the future, and Ms. Prudent may find herself in need of some additional permanent insurance coverage at some point in the future.
To recap, companies provide employees with group life insurance coverage as part of their overall benefit package. Group life insurance is a life insurance policy that the employer owns, which provides employees with insurance coverage at a cost that is much lower than it would be if the employee chose to obtain insurance on their own. The plan may require the employer to pay the premium; the employee may have to pay some of it as well.
The two types of group life insurance policies are contributory and non-contributory. Employees pay some of the premium in contributory group life insurance policies and the employer pays the rest. In a non-contributory group life insurance policy, the employer pays the entire policy premium, which means the employee does not have to pay any premiums. Since the employer pays the premium, the employee has a taxable benefit.
Most group life insurance contracts contain a conversion privilege that allows the employee to convert his/her group coverage to an individual insurance contract without having a physical or medical examination if he/she leaves the company for another job.
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