Group Life Insurance: Definition & Types

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  • 0:03 What Is Group Life Insurance?
  • 0:56 Types of Group Life Insurance
  • 2:54 Conversion Privilege
  • 3:45 Lesson Summary
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Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

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:

  • Contributory
  • Non-contributory

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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