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Do you automatically receive group life insurance in your employee benefits package? This could be a potentially great perk. But it’s important to do your own research to make sure such policies will actually protect you and your loved ones the way you wish.

Unfortunately, not all employer-sponsored policies are created equal. The fine print can sometimes reveal surprising things about these plans, and it’s your responsibility to pay attention.

With this in mind, let’s take a look at what group life insurance insurance actually is. We’ll also examine what it covers and some of the specific things to look for in a policy.

What is group life insurance?

Group life insurance is offered by an employer or large-scale entity such as a labor organization to its workers. This coverage is usually offered as one component of a larger benefits package.

Group life insurance provides coverage for a specific period of time. It also pays a benefit if a covered person dies during the term of protection. This base level of protection can be increased by the individual’s personal savings and other possible financial resources. The death benefit is paid income tax free to the named beneficiary.

Group life insurance is typically much more affordable than an individual policy. This is because its purchased through a provider on a wholesale basis for its members. Those receiving may not have to pay anything out of pocket to receive coverage. Or they may decide to their portion of the premium deducted from their paycheck.

What to look for

While group life insurance may seem like a great benefit as an employee, it may not fulfill all your coverage needs. Following are some things to investigate before deciding whether a particular policy is satisfactory for your situation.

  1. Is your life insurance policy portable?

The first question you should ask when receiving such a policy through your workplace is what will happen to it when you retire. Is it portable?

Some companies require you to have participated in their group life insurance program for 10 years in order to take your basic coverage into retirement at no cost. Be sure to read the fine print as there are often other stipulations, such as submitting an application for retirement within a month of leaving the company in order to take the policy with you.

Another option your employer may offer for group life insurance is to continue coverage at a reduced rate after an employee retires. For example, the coverage could reduce by 15% of the original amount at age 70, then it reduces again by an additional 25% of the original amount at age 75. Eventually the coverage would end or drop to a final reduced amount.

Other companies may not let you take your same policy into retirement, but they may offer other transfer options. For example, you may be able to convert your group life coverage into an individual life insurance policy when you retire from the company.

In many cases, you can can convert up to the full amount of coverage you had on your group plan. While it might be the same rate, oftentimes your new premium will be much higher than the previous premium you were paying as part of the group coverage.

There are also age limitations for porting coverage in retirement. And, some ported coverage terminates if the employer’s contract with the insurance company terminates.

How to fix it

Did you find out your policy is not portable upon retirement or separation from the employer? Look into purchasing an individual policy that you completely own. This will lock in your insurability and low rates. That way, no matter how many times you change jobs in the future or how poor your health becomes, you are never at risk of not being able to qualify or afford the coverage you need.

  1. Does it cover all instances of death?

Another question you should ask about your insurance is whether it covers all instances of death. This means more than just accidental death or dismemberment.

If you have accidental death or dismemberment coverage, the company will only pay out a lump sum in the event that you die due to an accident. There is usually a partial benefit payout for a loss of one or more limbs. With this type of coverage, if your death is due to an illness or natural death there will be no payout.

Even if your insurance does cover all instances of death, there is a suicide clause in most policies. Depending on the state, it will be either a one-year or two-year clause. This means if you commit suicide within the first year or two years of the contract, the beneficiary would receive the premiums back but not the death benefit.

How to fix it

Did you find out your policy only covers accidental death or dismemberment? Consider switching to coverage that includes all instances of death.

  1. Is the premium taxable to you?

Be advised your group life insurance policy may come with a tax cost.

The premium cost for the first $50,000 of life insurance coverage under a group term life insurance plan does not have to be reported as income. You also don’t pay taxes on it under IRS laws. But anything your employer covers over that amount could trigger a taxable income for the “economic value” of the coverage provided to you.

The taxation of life insurance proceeds depends on several factors. Those include whether you paid your insurance premiums with pre- or after-tax dollars. If you buy a group life insurance policy through your employer, you probably pay premiums with after-tax dollars.

Different rules may apply if your company offers the option to purchase life insurance through a qualified retirement plan and you make pre-tax contributions. This option offers some income tax advantages. But one tradeoff is that each year you’ll pay a small tax on the economic value of the “pure life insurance” in the policy. This is difference between the cash value and the death benefit.

Also, at death, the amount of the policy cash value that is paid as part of the death benefit is considered taxable income.

How to fix it

Make sure you’re aware of the premium taxation on your group policy. That way you can decide whether it’s worth keeping, or better to purchase an individual policy. Many people still keep their group policy even after obtaining their own insurance because they assume it’s “free.” After factoring in taxes, however, you’ll realize this isn’t the case.

The bottom line:

Make sure your paycheck has proper insurance and protection. Do your homework on the specifics behind your company’s group life insurance. Then you can find out if it’s the best choice, or if you need to supplement your coverage.

Hopefully you now realize how important it is not to take the face value of your group policy lightly. Find out exactly what’s behind those numbers. If you wait too long, it could be too late.

Sources: Forbes, Investopedia

Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and President of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®
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