Group Life Insurance

Perhaps the easiest employee benefit to understand is group term life insurance.This contract provides a death benefit for a specified period, typically one year. When the term expires, the policy can be renewed. If an employer offers this benefit, when a covered employee dies, a beneficiary (identified in the enrollment card filled out by the employee ) receives the death benefit.

The insurer bases the premiums for group term life insurance on the average age of the covered employees. Unlike an individual. a group's average age does not necessarily increase every calendar year. In fact, if several older employees were to retire and were replaced by younger employees, the average age of the group would go down. Thus the age and number of employees entering and leaving immediately affect the average age of a group.

Most employers offering this benefit cover only full time workers, but some also may offer the coverage to part time employees. Some employers also offer coverage, often in reduced amounts, to retired employees.

The amount of insurance may be a flat amount For example, each beneficiary receives $25,000 if a covered worker dies. Alternatively, the amount of insurance may be based on a position schedule. In this case, the benefit may be $40.000 for salaried workers and $20,000 for hourly workers. The amount of insurance also may be a percentage of earnings. For example, each employee's benefit equals one year's salary or, perhaps, 150 percent of annual salary. Combinations of these approaches are possible. For example, in one company, benefits equal 200 percent of annual salary for upper level managers, 150 percent for middle managers, and 100 percent for all other employees.

The employee is generally allowed free choice when designating a beneficiary, and generally may assign contract rights if proper notification is given to the insurer. The employee or beneficiary has several choices when choosing a settlement option. These are comparable with the settlement options available with individual insurance: lump sum payment, lifetime income, or payments for a limited period.

Most contracts allow for conversion of the group insurance coverage to individual insurance if the employee leaves the group. This right is rarely exercised except by people otherwise uninsurable. One reason for the relatively small number of conversions is that the conversion must be from the group term policy to a cash value type of coverage with premiums calculated at the insured's age at the time of conversion. If the employee is older when making a conversion from group term to individual coverage, these premiums tend to be relatively high. If the employee leaves one employer's group to enter another employer's group, an expensive conversion would not be attractive. If the employee left the group and is unemployed, an expensive conversion may not be affordable.

The federal income taxation of group term life insurance allows the employer a deduction for premiums paid, as long as an employee's total compensation is reasonable. The employee does not have to report the premium paid as income, as long as the insurance benefit is less than $50,000. If the benefit is greater than $50,000, the premiums for the insurance in excess of $50,000 are included in the employee's taxable income based on a government table showing increasing cost per month for each $1,000 of coverage based on the employee's age. Table 22 1 presents the rates. For example, assume Lona Ranger was 45 years old and received a $120,000 group life insurance benefit from her employer. She would have to include the premium for $70,000 ($120,000 $50,000) of life insurance in her taxable income. This is calculated as $0.29 X 12 X 70, or $243.60.

Most financial advisors recommend that people not rely entirely on group term life insurance, or even a combination of group term life insurance and social security survivor benefits, for their life insurance program. Several reasons exist for this advice First, the benefits may be inadequate to meet all financial needs and goals. This outcome is likely because employers determine benefit amounts without considering employee needs. Second, the benefits may be unavailable if employment ends or the employer cancels the plan because of bankruptcy, merger, or other reasons. The unlike. LaHood of conversion of group insurance to individual insurance was already noted, Third, group term life insurance involves no savings, and this feature of individual cash value life insurance may be important to some people. Thus, most people will recognize group life insurance as one leg of a tripod, with Social Security and individual life insurance as the other two legs.