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Nearly two-thirds of Americans rely on group life insurance from work. Yet nearly half of these people either don’t understand or have some understanding of how it works, according to the Insurance Scale study by LIMRA and Life Happens, two 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 is the holder of the policy covering the employees. Beneficiaries will receive benefits if you die while covered by group insurance.
The most common group life insurance policy is offered by employers. However, some churches, professional associations, alumni groups, unions, and other affiliated organizations offer group life insurance to members.
There are several different formulas used to calculate group life insurance benefits. Here are some of the most common types.
Fixed earnings multiple benefit plans
Group life insurance plans peg the death benefit amount to a multiple of your salary, such as twice your annual salary. Since the payment is tied to your salary, the level of protection goes up as your income increases.
Multi-earning variable benefit plans
The benefits of these group life insurance plans depend on your earnings multiples at certain thresholds. For example, the death benefit may be equal to your salary if you earn less than a certain amount, or it may be twice your annual income if you earn more than a certain amount.
Dollar fixed benefit plans
These group life insurance plans pay the same amount to all employees and are a fixed dollar amount. Payments ranging from $10,000 to $25,000 tend to be the most common.
Dollar variable benefit plans
Variable amount plan dollar payments can vary based 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 dies.
Companies offer group life insurance as a way to help attract and retain talent. For companies, 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 lifeline. However, one thing you should know about group life insurance is that it is often not sufficient on its own. Group life insurance is sometimes called supplemental life insurance because it aims 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 feature, it has its pros and cons.
Advantages of group life insurance
- Group life insurance is generally less expensive than individual life insurance because the employer pays all or most of the cost.
- It is often easier to qualify for group life insurance because no medical exam is required—unless you want to purchase an additional group life.
- Group life insurance is easy to get because you can enroll during employee onboarding or open enrollment.
- You may be able to add coverage for a spouse and/or dependents.
Disadvantages of group life insurance
- If you quit your job, you often lose coverage. The only exception is if your policy is “carry-on,” meaning you’ll continue to purchase group life insurance (at your own expense) after you leave the job.
- 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, as you can with permanent life insurance.
Summary: The pros and cons of group life insurance
When do you get group life insurance?
If your employer offers free group life insurance, it makes sense to sign up for it. It usually costs nothing and will provide more financial security for your beneficiaries in the event of your death. Even if you have to pay for group life, it is usually cheaper than an individual life insurance policy.
What’s more, group life insurance can be a great way to get coverage if you’re having trouble qualifying for an individual policy due to health issues. This is because underwriting standards are often more lenient than group policies.
Group life insurance requirements
To qualify for group life insurance, you usually must be an active employee of the company offering the policy. Some policies may require that you work a certain number of hours per week to qualify, while others may be available to all employees regardless of status.
Group life insurance premiums
Group life insurance premiums are often paid in whole or in part by the employer. If you pay a portion, it can be deducted from your salary. Your premium can depend on factors such as your age, your 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
Group life insurance costs vary depending on the 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 through an employer is usually very low.
For example, here’s a look at Walmart and Amazon Group Life Insurance, two of the largest companies in the United States
Walmart It gives full-time employees a company-paid life insurance equal to their annual wages, up to $50,000. On top of that, 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.
The 40-year-old Walmart employee who does not use tobacco pays $0.0295 for $1,000 or $2.95 per bimonthly pay period for $100,000 in additional coverage.
These additional premiums are deducted from your paychecks.
Amazon Most part-time and full-time employees are given free basic life insurance equal to twice their annual salary. Employees have the option to purchase additional coverage of up to 10 times their base annual earnings.
For example, a 40-year-old full-time Amazon employee will 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 receive a monthly premium of $5.90.
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Frequently asked questions about group life insurance
Does group life insurance pay?
Group life insurance policies pay the death benefit if the insured dies while the policy is in effect. The death benefit can be used by the beneficiaries in any way, such as covering funeral costs or paying daily bills.
Group life insurance may also offer an accelerated death benefit, which pays 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 life insurance?
Group life insurance is usually provided by the employer and covers all employees of the company while individual life insurance is a policy that you buy for yourself. The main benefit of group life insurance is that it is usually less expensive than individual insurance policies. However, group life insurance usually provides small amounts of coverage and you usually lose coverage if you quit your job.
Individual life insurance offers more flexibility – you can choose from different lengths of coverage, death benefit amounts, and commuter life insurance that adds additional coverage. Individual life insurance is usually more expensive than group life insurance.
What are the types of group life insurance?
There are three basic types of group life insurance that you might see if your employer offers you this benefit.
- Group basic life insuranceLife insurance, also known as supplemental life insurance, is usually free and employees cannot be denied. For this reason, it makes sense to sign up for basic group life coverage if it is available to you.
- Voluntary life insurance Supplemental group life insurance that you can buy for yourself if you want more than what your employer is offering for free. Voluntary life insurance may require you to submit a “Proof of Insurance” form which you will need to have approved by the insurance company.
- Voluntary dependent life insurance It is the additional coverage that you can purchase 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 every year you operate. Your beneficiaries will receive a death benefit if you die while the group life policy is active.
Can I convert a group life policy into an individual life policy?
If you leave your employer, you may be able to convert your life insurance policy into an individual policy, as some group policies have a conversion option. But before you do, it’s important to know that your premium after the conversion may be higher than if you purchased a comparable individual life insurance policy. That is, unless you have health issues that make it difficult or expensive to qualify on your own policy.