Benefits & Disadvantages of Group Term Life Insurance

Do you know that life insurance can protect your family from financial stress?

According to a 2016 report, 37% of American families have no life insurance. Further, 62% of those without life insurance said they would be in immediate financial trouble if the primary wage earner died.

Group term life insurance is one way people can close this gap in their financial planning.

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Understanding Term Life Insurance

There are several types of life insurance. One of the most common is term insurance.

As the name indicates, the policy is in force for a fixed number of years. Depending on the provider, the term can be for 10, 15, 20, 25 or 30 years.

No matter the term of the policy, premiums never change. The coverage — the amount a beneficiary receives upon the death of the insured person — also never changes for the duration of the policy.

Term insurance can be an easy way to help reduce financial risk for a family with a mortgage and/or children still in school.

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Understanding Group Insurance

Group insurance policies provide coverage for many people who don’t know each other. It’s the kind of insurance policies employers arrange when they offer health and/or life insurance to their employees. The employer is the policy sponsor.

Associations, financial institutions, unions, and other large groups can also be sponsors. In these cases, the insured people are customers or members.

Putting Term and Group Together

When you get term insurance through a group policy, the term is no longer a fixed number of years. Instead, the term is tied to your relationship with the sponsor. That is an important and distinct characteristic of this kind of life insurance. We’ll explore that aspect later in this article.

Before joining a group term life insurance policy, consider these benefits and disadvantages:

Benefits of Group Term Life Insurance

There is no easier way to protect your family in the event of your death than through group term life insurance.

The policy sponsor pre-arranges the rate, coverage limits, and available terms. You decide the amount of coverage. (Coverage is the amount your beneficiary would receive upon your death.)

In the vast majority of cases, there is no medical exam required. This can be of value to anyone with health issues that increase the cost of individual insurance.

Instead of a physical exam, insurance companies (also known as carriers) use a health questionnaire. Depending on the terms of the policy, simple medical tests or documentation from your physician may also be necessary.

If you have health issues, it’s possible that a group term life insurance policy can give you the coverage you might have trouble getting as an individual.

No matter what, the health screening process will be less time-consuming than the medical review for an individual policy.

Providing truthful answers to the questionnaire is essential. If the worst should happen and you die while insured under the policy, the health questionnaire will be reviewed. Any discovery that the questionnaire had false or misleading information that related to cause of death, the insurance carrier might not pay your beneficiary.

With group policies, the cost of insurance is likely lower than if you obtained the same coverage as an individual. The cost of insurance is measured in increments of $1000 of coverage.

It’s not unusual for employers or unions to pay the premium for “base” coverage. (The premium is the cost of insurance paid at regular intervals.) The most common base coverage is the amount equal to one or two times your annual salary.

Another common benefit is the option to buy supplemental coverage for a stay-at-home spouse.

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Disadvantages of Group Term Life Insurance

Portability is an important aspect of group term life insurance to consider.

With group term life insurance, there is no portability of the base coverage. This means if you leave your employer (or whichever organization is the sponsor), your coverage ends. In practical terms, that could increase your family’s financial vulnerability if you have no other kind of life insurance.

Supplemental coverage can sometimes be portable to an individual policy issued by the same insurance carrier. But the rate per $1000 of coverage will be higher and more detailed medical information will likely be required.

With a group term life insurance policy, you have no choice of carrier. Generally, this isn’t an issue. But it is something to be aware of, especially if you want to diversify your insurance coverage.

There may also be limits on how much supplemental term insurance you can buy through a group policy. Depending on your circumstances, you may need additional life insurance policies.

The final aspect to consider about this kind of life insurance is that its term, not universal or whole life. In other words, the policy can expire before you do. And if you don’t have other insurance, it can leave those who depend on you vulnerable.

Group term life insurance is good. But, in general, it’s advisable to make it part of your insurance coverage, not all of it.

Next Steps

The first step to buying insurance is always figuring out how much you need. A financial adviser can help you. Insurance companies also offer many free online calculators and other resources.

Also, make sure you understand the language and terms used by insurance companies in their policy documents.

The NAIC (National Association of Insurance Commissioners), sets standards and provides regulatory support to insurance organizations across the country. They offer a wide range of information and resources to help you be an informed consumer.

You can then comparison shop with increased confidence.

Buying life insurance doesn’t have to be overwhelming. If you have any questions on group term life insurance or need help getting covered, we’re only a call away.

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Looking to compare life insurance prices? We can help. Enter your ZIP code to get free quotes from multiple insurers.

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