How does group term life insurance work?

Group term life insurance works in a way that a single contract provides the coverage to a whole group of individuals. Group life insurance is provided to a company or organization, for the insurance coverage of a bunch of employees. The employer, being a policy owner, keeps the master contract while the employees are provided with a document as proof of insurance.

What is life insurance?

  • Life insurance has gained high popularity because of the benefits associated with it. People who have heard the name of insurance and want to know that what is life insurance and how does life insurance work, here is the answer to that question.

  • Life insurance is an agreement between an insurer and a policyholder, which is followed by policy according to which the policyholder pas monthly or annual premiums, and the insurance company provides the beneficiary or beneficiaries of policyholder a death benefit in case of unlucky demise of the policyholder.

  • Life insurance can further be divided into two types, one is permanent life insurance while the second one is term life insurance. They both differ from each other according to the associated benefits and terms of their activity.

What is permanent life insurance?

  • Permanent life insurance is a type of life insurance that provides coverage to the whole life of policyholder along with the death benefit. To clearly understand that what is permanent life insurance and how does it proceed, one has to study the details of permanent life insurance.

  • Permanent life insurance offers a saving component throughout the life of the policyholder that is known as a cash-value account. Cash value account is an investment account that keeps growing because of the interest accumulation.

  • Policyholders can borrow against this cash value and even can pay premiums from it if there is enough money in the cash value account. Permanent life insurance is further subdivided into whole life insurance, universal life, variable life insurance and variable-universal life insurance.

What is term life insurance?

Term life insurance is also known as pure life insurance. It is a type of life insurance that offers a guarantee to pay the predetermined death benefit if the policyholder dies within the specific term decided in the contract. After the expiry of a term, the insured can proceed in various ways:

  1. Renewal for next term
  2. Conversion to permanent insurance
  3. Termination of a policy

What is group term life insurance?

A subtype of term life insurance is called group term life insurance. In group term life insurance, the policy provides coverage to a group of individuals rather than a single person. Group term life insurance is mostly acquired by the employer of a company or an organization to cover the whole bunch of employees.

Mostly the employers pay the policy premiums and employees have an option to buy supplemental coverage or the insurance for his family. It’s comparatively cheaper than the individual life insurance and hence more popular.

Group term life insurance is a type of insurance that is provided to a group of people rather than the person. This policy is mostly offered to the companies that want to provide coverage to their employees.

How does group term insurance proceed?

Group term life insurance is included in the package of facilities that are offered to the employees by their company or organization. How does group term life insurance work, is a matter of discussion here.

Frequently, it’s far less costly than the individual life insurance policy. Group term life insurance is such an attractive offer for the employees that if offered should be taken immediately if the employee has not been a policyholder for any other kind of policy.

Generally, most or all premiums of a group term life insurance are paid by the employer of the company, however, the employee can pay an extra amount other than the fixed premiums.

Master contract

Group term life insurance is an insurance policy that is provided to the employer of a company for the coverage of his employees under group life insurance. Being the policyholder, the master contract is kept by the employer. However, employees also have a document as proof of insurance policy although it’s not the actual contract.

Enrollment for group term insurance

Generally, all the employees of a company who are eligible get automatic enrollment for group term insurance. Eligibility criteria may include the working hours or job status of an employee.

Choosing a beneficiary

The beneficiary is the person who is nominated by the policyholder to receive the death benefit in case of his death. Just like all other policies, the employees who are provided with the group life insurance also have to make the nomination of a beneficiary.

Duration of a term

The time after which a term life insurance policy gets expired is referred to as the duration of the term. Group term life insurance usually expires after one year and can be renewed again.

How much coverage is provided to the employee depends upon the salary of the employee. The amount of policy is normally double than the annual pay of the employee.

Conversion of policy

Group term life insurance remains active until the end of term or termination from the job. However, there is a facility to convert the group insurance to individual term life insurance if the employee is going to leave his employer or company.

When an insurance policy is converted from group term insurance to individual insurance, premium rates get much higher than the previous ones. This is the reason most policyholders don’t convert the policy from group to individual.

If a person wants to keep two types of policies e.g. group life insurance and individual life insurance policy, it’s quite possible to do this.

Tax implications for group term insurance

Most of the people, before signing a contract for insurance often wonder that is life insurance taxable? Yes, in some cases, for example, employer-paid premiums on the behalf of employees are tax-free until they are up to $50,000. If the insurance coverage is more than $50,000, is considered as income of an employee and is referred to be taxable.

The master contract is kept by the employer who is the policy owner. Employees have insurance certificates as proof. The beneficiary or contingent beneficiary is chosen and the employee has the option to convert the policy from group to individual when he terminates the job.

What are the pros and cons of group term life insurance?

Each type of insurance policy has some benefits and drawbacks associated with it. Just like whole life insurance, universal life insurance, or individual term life insurance, group life insurance also has some pros and cons that must be considered before jumping into the policy.

Pros of a group term insurance

  • Group term life insurance is relatively cheaper than the individual life insurance

  • Employees don’t have to pass through all the legal matters as the master contract is signed by the owner of the company or organization

  • All the employees of a company or organization who are eligible for policy are automatically enrolled without any need to apply for it.

  • It acts as an extra benefit other than the facilities package offered by the company

  • It is convertible from group insurance to the individual life policy.

Cons of group term life insurance

  • In contrast to the individual life insurance, the premium rates for group term insurance keep on increasing.

  • Although it’s cheaper than the individual policy, yet the amount that is provided is not enough. So, there is a need for additional individual life insurance to meet financial issues.

  • Insurance coverage is variable in each company or organization which is offering this insurance to its employees, depending upon the multiple factors including the number of dependents, job designation, basic salary, or the job status.

  • Insurance ends with the job termination of an employee and at that time it’s most difficult for a person to buy individual life insurance.

Group life insurance is cheaper and convertible. However, coverage is mostly not enough and there is a need for an additional individual or supplemental life insurance. Moreover, it terminates with the termination of employment.

What is supplemental life insurance?

  • If a person is going to be a part of group term life insurance, he may be hearing of the supplemental life insurance. What is supplemental life insurance and how does it differ from other types of policies, is a point to ponder before indulging in it.

  • Supplemental life insurance is a type of insurance that a person can acquire in addition to the basic group term or individual life insurance.

  • Coverage provided by group term life insurance is usually not that enough, hence the employees go for supplemental life insurance offered by their company by paying very low additional premiums. It may provide burial coverage or accidental death etc.

Supplemental life insurance is mostly purchased by the employees of a company in addition to the group term life insurance or whole life insurance if these policies don’t offer handsome coverage.

Frequently asked questions

In addition to the above-mentioned details, people have further queries regarding the life insurance policy. A few of them have been answered below:

1. Who pays the premiums of group term insurance?

In most cases, premiums are paid fully or partially by the employer of a company or organization that is offering this facility to the employees. However, if the employee wants to pay additional premiums to add in the amount of policy, he can acquire the supplemental insurance option.
Supplemental life insurance pays directly to the employee if his expenses are more than the basic insurance coverage.

2. Do you still need life insurance over 60?

Most people have life insurance at a young age to protect their families from the financial crisis in case of their accidental demise. But when a person reaches his 60’s he may start wondering that as his children are now grown-ups and independent, does he still need the policy to secure their future?
Generally, there is no need for life insurance after the age of 60, yet there can be some reasons when there may be a need for insurance. For example:

  • If a person has dependent children or grandchildren whose parents are not alive
  • If the parents want to leave some inheritance money for their children
  • If you have a spouse who won’t be able to survive in case of your death

3. Is group term life insurance taxable?

Employer-paid premiums on the behalf of an employee are generally not taxable. But if the premiums limit exceeds a certain amount, it is considered as the income of an employee. For instance, if the insurance coverage is more than $50,000, it becomes taxable although less than or up to $50,000, it is not taxable.

4. Is group term life insurance a good idea?

In certain circumstances, group insurance is a better idea as compared to individual insurance. For example, if a person has such health conditions that he will not be able to buy an individual term life insurance at the good rates, he should take advantage of a group term life insurance.

Moreover, it’s cheaper than the individual life insurance, and most or all the premiums are paid by the master contract holder who is the owner of the policy. However, if a person has an intention for not staying at a company for a long time, he may not take benefit from group term life insurance.

5. What happens if you outlive your term life insurance?

Term life insurance offers death benefit if the policyholder dies within the predetermined term. If an insured dies just the next day of expiry of term life insurance, his beneficiaries will not receive any death benefit.

If a policyholder lives longer than the specific term, he may renew it to keep the policy in force or terminate it. If nothing is done after the expiry, there will be no coverage provided if the policyholder dies.


  • Group term life insurance is a type of insurance policy that is bought by a company or organization to provide coverage to the employees.
  • Group term life insurance works in a way that master contract remains in the custody of the employer who is the policy owner and most or all the premiums are also paid by the employer.
  • There is an option to convert the group insurance into individual insurance, but, it’s costly than the group insurance.


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