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Approximately two-thirds of Americans rely on group life insurance from a job. However, nearly half of those people either don’t understand or only somewhat understand how it works, according to an Insurance Barometer survey by LIMRA and Life Happens, both industry-funded groups.
What is group life insurance?
Group life insurance is a single contract that provides coverage to a group of people, usually those who work for the same company. The employer owns the policy that covers the employees. Your beneficiaries will receive a payout if you die while covered by group insurance.
The most common group life insurance policy is provided by employers. However, some churches, professional associations, alumni groups, unions and other related organizations offer group life insurance to members.
There are many different formulas used to calculate group life insurance benefits. Below are some of the more common types.
Fixed plans for many profits
These group life insurance plans tie your death benefit amount to a multiple of your salary, such as twice your annual salary. As the payout is linked to your salary, the level of protection increases as your income increases.
Variable plans for multiple earnings
The benefits of these group life insurance plans are based on multiples of your earnings at certain thresholds. For example, the death benefit may be equal to your salary if you make below a certain amount, or it may be twice your annual earnings if you make above a certain amount.
Fixed dollar amount benefit plans
These group life insurance plans pay the same amount to all employees and are a fixed dollar amount. Payouts ranging from $10,000 to $25,000 tend to be the most common.
Variable Dollar Amount Income Plans
Payments under a variable dollar amount plan can vary depending on your earnings and length of service.
What is the purpose of group life insurance?
The purpose of group life insurance is to help provide peace of mind to employees and their families, knowing that they will have some financial security if the person covered by group life insurance passes away.
Businesses offer group life insurance as a way to attract and retain talent. For businesses, offering group life insurance can be an effective way to show employees that they are valued and that their well-being is a priority.
For families struggling to make ends meet, group life insurance can be a lifesaver. However, one thing you should know about group life insurance is that it is often not enough on its own. Group life insurance is also sometimes called supplemental life insurance because it is designed to provide additional protection beyond an individual life insurance policy.
Our life insurance calculator can help you estimate how much life insurance you need.
Pros and cons of group life insurance
Although group life insurance is a valuable asset, it has its pros and cons.
Advantages of group life insurance
- Group life insurance is usually less expensive than individual life insurance because your employer pays all or most of the costs.
- It’s often easier to qualify for group life insurance because no medical exam is required—unless you want to buy additional group life.
- Group life insurance is easy to get because you can sign up during employee onboarding or open enrollment.
- You may be able to add coverage for a spouse and/or dependent.
Disadvantages of group life insurance
- If you leave your job, you often lose coverage. The only exception is if your policy is ‘portable’, meaning you continue to buy group life insurance (at your own expense) after you’ve left work.
- The death benefit of a group life insurance policy is usually lower than that of an individual policy.
- Most group life insurance policies have no cash value, which means you can’t borrow against them like you can with permanent life insurance.
Summary: Pros and Cons of Group Life Insurance
When to Get Group Life Insurance
If your employer offers free group life insurance, it makes sense to choose it. It usually costs you nothing and will provide your beneficiaries with a little more financial security in the event of your death. Even if you have to pay for group life, it’s usually cheaper than an individual life insurance policy.
Additionally, group life insurance can be a great way to get coverage if you have trouble qualifying for an individual policy due to health issues. This is because signing standards are often more lenient for group policies.
Group Life Insurance Requirements
To be eligible for group life insurance, you must usually be an active employee of the company offering the policy. Some policies may require you to work a certain number of hours per week to qualify, while others may be available to all employees regardless of status.
Premiums for Group Life Insurance
Group life insurance premiums are often paid in whole or in part by the employer. If you pay part, it can be deducted from your salary. Your premium may depend on factors such as your age, salary and whether you smoke. Your employer may also offer different levels of coverage at different price points, so you can choose how much coverage you want based on your needs and budget.
The cost of group life insurance
The cost of group life insurance varies depending on your employer, the life insurance company, and characteristics of the group, such as the average age of employees. The average cost of group life insurance purchased by an employer is usually quite low.
For example, here’s a look at the group life insurance of Walmart and Amazon, two of the largest companies in the US
Walmart gives full-time employees company-paid life insurance coverage equal to their annual salary, up to $50,000. Additionally, hourly associates can pay up to $200,000 in group life insurance, while salaried associates and drivers can pay up to $1 million in coverage .
A 40-year-old full-time Walmart employee who doesn’t smoke pays $0.0295 per $1,000, or $2.95 per two-week pay period for $100,000 of additional coverage.
These additional premiums are deducted from wages.
Amazon gives most part-time and full-time employees free basic life insurance equal to twice their annual salary. Employees have the option to purchase additional coverage up to 10 times their basic annual earnings.
For example, a 40-year-old full-time Amazon employee would pay $0.059 for every $1,000 of additional coverage. If that employee wanted to purchase $100,000 of additional group life insurance, they would have a monthly premium of $5.90.
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Frequently Asked Questions About Group Life Insurance
Does group life insurance pay out?
Group life insurance policies pay a death benefit if the insured dies while the policy is in force. The death benefit can be used by beneficiaries in any way, such as covering funeral expenses or paying everyday bills.
Group life insurance may also offer accelerated death benefits that pay a percentage of the death benefit amount while you are alive if you are diagnosed with a terminal illness.
What is the difference between group life insurance and term life insurance?
Group life insurance is usually provided by an employer and covers all of the company’s employees, while individual life insurance is a policy you buy for yourself. The main advantage of group life insurance is that it is usually cheaper than individual policies. However, group life insurance usually only provides small amounts of coverage, and you usually lose coverage if you leave your job.
Individual life insurance offers more flexibility – you can choose from different cover lengths, death benefit amounts and life policies that add extra cover. Individual life insurance is usually more expensive than group life insurance.
What are the types of group life insurance?
There are three main types of group life insurance you can look at if your employer offers this benefit.
- Basic group life insurance, also called supplemental life insurance, is usually free and employees cannot be denied. It therefore makes sense to enroll in basic group life cover if it is available to you.
- Voluntary life insurance is the additional group life insurance you can buy for yourself if you want more than what your employer offers for free. Voluntary life insurance may require you to submit a “Proof of Insurability” form, which must be approved by the insurance company.
- Voluntary dependent life insurance is the extra cover you can buy for your spouse, partner or children through your workplace benefits.
What is the most common type of group life insurance?
The most common type of group life insurance is term life insurance. Coverage renews each year you are employed. Your beneficiaries will receive a death benefit if you die while the group life policy is active.
Can I convert a group life policy to an individual life policy?
If you leave your employer, you may be able to convert your life insurance policy to an individual policy, as some group policies have a conversion option. But before you do, it’s important to know that your premium after conversion may be higher than if you bought a comparable individual life insurance policy. That is, unless you have health issues that make it difficult or expensive to qualify for your own policy.