Group Life Insurance Policies Explained

Group life insurance is a type of life insurance which covers an entire group of people by a single insurance contract with an organization or employer owning the policy, and individual members provided a financial benefit paid at the death of a covered person or other covered condition occurring.  Within-group life insurance policies, covered conditions may include accidental death & dismemberment (AD&D), loss of speech, hearing or sight, and paralysis.

 

These Group plans are made available to eligible employees at hiring or at an open enrollment period as part of an organizations benefits package. Sometimes group life offers the members of the group an option to protect their dependents. Typically, the organization pays some or all the premium with the employee or group member paying the difference if any.  

 

Group Life Insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Factors and Features of Group Life Insurance Policies

Group insurance is typically cheaper than an individual policy as a group policy tend to reduce the risk of adverse selection faced by the Insurer. In a group policy, the members of the group do not exist primarily to purchase insurance but to, however, fulfill other organizational goals. It is, therefore, less liking for an individual expecting and adverse outcome to buy a group life policy allowing the insurer to have a risk pool that is above average and to give more affordable rates.

 

Additionally, the employer or organization subsidizes group insurance policies by carrying out some of the administrative functions reducing administrative cost which further reduces the rates providing members of a group insurance policy with benefits at lower or no cost.

 

Group life policies protect the entire group under a single contract (master contract), and those who elect coverage receive a 'certificate of creditable coverage' or ‘certificate of insurance.’ This certificate serves as proof in the event of the death of the insured and or for the conversion of the group policy to an individual policyIn the case of a covered person's death, the insured's beneficiary is paid by the insurer the financial benefit. 

 

This type of insurance policy is flexible and straightforward; usually, there is no need to go through a medical examination to be selected. Factors such as the number of dependents, rank of the employees, employees’ salary, and employment tenure of the member with the company or group determine the coverage amount.

 

Typically, employees will enjoy the coverage of a group policy until the end of a particular period or the end of their employment with the organization and in some instance into their retirement. A major feature of group life policies is that an Insured may be provided the plan's benefits at no cost or subsidized cost, however, they get more expensive if an employee stops working or cease being a member of the group.  The member may have the option of converting the group policy to an individual policy upon leaving the employer often time at a higher premium. This conversion option is typically an attractive option for those who are otherwise uninsurable.

 

Group policies offer supplemental additional group coverage in conjunction with a primary coverage option that amounts to several times the employee salary. This supplemental option provides the employee additional group coverage at his or her expense.

 

Groups Life insurance is portable meaning that an employee or member that lose their job or who is now retired lose their group eligibility, however, can carry the coverage with them generally until they reach age 70 and make their payment directly to the insurer by a method designated.

 

 

 

The Types of Group Life Insurance Policies

Group policies vary, with the master insurance policy outlining its key provisions and benefits.  It may define details such as the plan eligibility, policy administration, underwriting requirement including invoicing for the premium due, claims payment, and of course, setting up the insurance coverage. This document may also outline when the coverage will start and end and how the insurer calculates premiums.  The types of Group policies that are typically available are Group term, Group Universal Life (GUL) and Group Variable Life (GVUL): 

 

  1. Group Term Life Insurance

Group Term Life Insurance is structured similarly to an individual term policy. It pays to the beneficiary the coverage or face value in the event of the death of the insured and does not provide investment or cash value feature.  This type of policy is the cheapest group insurance option and is typically provided by the insurer in the form of a yearly renewable term policy. At policy renewal, the policy may be canceled by employer or insurer, and policy rates may also increase. Premium costs are sometimes paid for by the organization and offer coverage amount typically several times an employee’s annual salary. 

 

2. Group Universal Life

Group Universal Life policies GUL is a permanent insurance option and is designed to provide coverage and a cash value for the insured lifespan. This system, however, offers superior premium payment flexibility and may be adjusted by the customer when needed. Premium is then paid into separately managed sub-accounts and is indexed to a fund or investment traded within the stock market and allow the client to use accumulated savings or interest to help pay premiums over time. The insurer charges Mortality charges, administrative costs, and other expenses within these policies

 

GUL allows for contributing additional premiums above the cost of insurance into a tax differed interest-bearing account with a fixed rate of return guaranteed never to fall below a certain minimum. These types of policies offer savings growth for future expenses and the option to purchase paid-up life insurance, or an annuity at retirement. They also offer dependent coverage that is available as a rider.

 

The advantages of the GUL policy include affordable rates and simplified underwriting process, along with a portable insurance policy.

 

3. Group Variable Universal Life

Group Variable Universal Life (GVUL) has similar features to an individual variable life insurance (VUL), in that it is designed typically to last the lifespan of the insured and offers a death benefit with a cash value option invested into separately managed sub-accounts. These subaccounts are invested directly into the stock market and may have expenses and fees, such as mortality, expense charges, fund expenses, management and distribution fees.

 

GVUL may also provide optional dependent coverage and typically provides tax differed earnings growth. This cash value can be accessed by the insured before age 59½, without penalty or surrender charges and additional cash, above the cost of insurance, can be invested into a range of variable investment portfolios managed by prominent money managers or invested in an account bearing a guaranteed minimum rate of interest.

 

Unlike the individual permanent policies group permanent policies such as GVUL, GUL policies may mature at an age listed within the policy certificate which may be less than the insured lifespan and coverage may also terminate if an employer changes or ends these policies. Use of group insurance may affect the availability of coverage at an inopportune time such as at retirement or after employment.

 

Additionally, withdrawals from a permanent policy may reduce the insureds death benefit and cash value. A reduced cash value diminishes the source of funding for the cost of insurance which increases as you age. Also, funding that exceeds certain limits may cause the insurance policy to become a modified endowment contract and be subject to “earning first” taxation on withdrawals and loans. The IRS may impose an additional penalty of 10% on the employee for withdraws and loans taken before age 59½ if these policies become a modified endowment contract.

 

 

Does a Group policy cause a tax liability for an employee?

A Group policy may cause additional tax liability depending on the type and amount of group insurance used by an employee. If the group life insurance policy used includes permanent benefits, such as a cash value or give a paid-up or cash surrender value, the IRS tax the cost of such benefit to the employee, minus the amount the employee paid for them.

 

A group term policy may also cause tax consequences for an employee if the total face value of such policies exceeds $50,000 and it is considered carried directly or indirectly by an employer.

 

Per the guidelines established by the internal revenue code (IRC) section 79 an insurance coverage is deemed carried by an employer if the employer pays any cost of the life insurance, arranges for the premium payments.  And additionally, if premiums paid by an employee subsidize the premium of another employee and policy coverage face value is above $50,000 This policy premium cost must then be included in income and taxed per the IRS Premium Table, and be subject to Medicare taxes, social security, and federal tax withholdings. 

Group Insurance tax per thousand

To calculate using the table above we use the employee's age on the last day of the employee’s tax year to identify the cost for the period (monthly, quarterly, semiannually and or yearly) and prorate the cost if the period is less than listed.

 

The cost of the insurance to include in an employee's wages by multiplying the number of thousands of dollars of all group term insurance coverage over $50,000 (to the nearest $100) multiplied by the cost shown in the table above less the cost to the employee.

 

As an example, a 55 years old employee who pays $200 annually for $400,000 of group term policy means included in the employee income is the cost of $350,000 in coverage.  To get the number of thousands, we must pay taxes on we divide the amount of face value above $50,000 by one thousand, e.g. ($350000/$1000 = 350). Then we multiply the annual cost per thousand from the table above by the total number of thousands subject to tax. This calculation gives us the total of $1,806. ($5.16 x 350 = $1,806) This total of $1806 less the $200 the employee pays, leaves $1606 to be included as income on the employee’s W-2.

 

Where the organization or group has multiple policies provided from the same insurer the IRC allows for a combined test to determine if the policies are carried directly or indirectly and allows an exception if the costs and coverage can be allocated individually between the polices. Policies from separate insurers must be tested separately to determine if an employer or group carry's it.

 

How does Group life policies affect my tax liability on an employee spouse and dependent policies?

Group life policies that cover an employee spouse or dependents can also incur taxes. This expense occurs when the carried amount of coverage exceeds $2000 making all the policy taxable, not just the amount exceeding $2,000. It is therefore advisable to ensure that group policies take advantage of the exclusion which applies for the first $50,000 of group life insurance coverage provided under a policy not carried directly or indirectly by an employer.