Group-term life insurance

Definition

Group-term life insurance is a type of life insurance policy that provides coverage for a group of people, typically employees of a company, under a single contract. This insurance is often provided as an employee benefit and is designed to pay a death benefit to the beneficiaries of the insured individuals upon their death, usually without requiring medical exams or individual underwriting. It can be an attractive option for employers to offer as it can be a cost-effective way to provide financial security for employees' families.

5 Must Know Facts For Your Next Test

1. Group-term life insurance benefits are generally provided to employees without requiring them to pay premiums, making it an attractive compensation tool for employers.
2. The death benefit paid under group-term life insurance is usually excludable from the employee's taxable income up to $50,000 of coverage.
3. When employees leave the company, they often have the option to convert their group-term life insurance policy into an individual policy, but this may come with increased premiums.
4. Employers can deduct the cost of providing group-term life insurance as a business expense on their taxes, which can provide financial benefits to the business.
5. If the employer pays for premiums on amounts above $50,000 of coverage, those excess premiums may be considered taxable income to the employee.

Review Questions

• What are the key features of group-term life insurance that distinguish it from individual life insurance policies?
  • Group-term life insurance differs from individual policies mainly in its coverage structure, as it covers multiple people under one contract rather than requiring separate underwriting for each individual. This type of insurance is typically offered as a fringe benefit by employers and usually does not require medical examinations. Additionally, it often provides a higher amount of coverage at lower costs due to the collective risk of the group.
• How do tax implications affect both employees and employers concerning group-term life insurance?
  • For employees, the death benefit from group-term life insurance is generally not taxable up to $50,000 in coverage. However, if the employer pays premiums on amounts exceeding that limit, those excess premiums become taxable income for employees. Employers benefit from tax deductions on premiums paid for group-term life insurance, enhancing their ability to offer this as a low-cost employee benefit while also enjoying potential tax savings.
• Evaluate the impact of group-term life insurance on employee retention and recruitment strategies within organizations.
  • Offering group-term life insurance can significantly enhance employee retention and recruitment efforts as it adds value to overall compensation packages. By providing this financial security benefit, companies can attract top talent who appreciate comprehensive employee benefits. Moreover, when employees feel secure knowing their families will be taken care of in case of an unexpected event, they are more likely to stay with the organization long-term, reducing turnover costs and fostering a loyal workforce.

Related terms

Fringe Benefits: Additional perks and benefits provided by employers to employees beyond their regular salary, including health insurance, retirement plans, and group-term life insurance.

Beneficiary: A person or entity designated to receive the benefits from a life insurance policy upon the death of the insured individual.

Premiums: The payments made to maintain an insurance policy, which can vary based on the level of coverage and the group's risk profile.