What is Group Life Insurance

Group life insurance covers a large group of people who are all members of the same group. Historically, groups were based solely on occupation, like fisherman or farmer, not on where an individual worked. Today, company today that offers its employees life insurance coverage is offering group insurance, even though some in the company might be accountants and some might be warehouse workers. Only the people who work at that company are eligible for that group life insurance.

Other organizations that offer group life insurance are the federal government, state governments, unions and alumni and professional associations. The larger the group, the lower the cost to each individual, because the higher cost of insuring the older or less healthy members of the group is offset by the lower cost of insuring the younger, healthier members of the group.

A word of caution for those currently covered under a group insurance plan: Once a covered individual leaves the group, he or she is no longer covered. If employment is a condition of coverage, coverage ends if the employee leaves, retires or is terminated. For this reason, people with dependents are always urged to have a second life insurance policy that is not dependent on being a member of a group. This will prevent a gap in insurance coverage. It will also ensure that the individual meets insurability requirements should he or she wish to purchase another policy, or convert a term policy to a permanent policy.

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Basics of Group Life Insurance

For the most part, group life insurance can be obtained without having to take a medical exam or answer any health questions. Each member of the group is offered a basic amount of coverage for a certain amount of money. If the insurance is offered as part of an employee benefit package, the employer will often pay the entire amount. Officers of the company and other high-level executives are often provided with additional coverage at no charge. Larger coverage amounts can also usually be purchased via deductions through the employee's paycheck. This is called "supplemental insurance", even though it is all part of the same policy.

Group life insurance policies can also offer coverage in the form of dependent term life. With this type of policy, each member of the group can insure his or her spouse, domestic partner and children. Coverage is purchased at the low group rates rather than at higher individual rates.

Term life is the most popular form of group life insurance. It's easy to purchase, easy to understand and those who eventually exit the group do not have to worry about "rolling the policy over" or moving it. Some larger life insurance companies like Met Life, Prudential and Axa Equitable offer permanent group life policies in the form of group variable life and group universal life. These group policies have the added benefit of building cash value over a longer period of time. While the investment options can be confusing and not well-suited for some members of the group, others will be able to take advantage of the tax-deferred growth and investment diversification.

Each state sets its own requirements for group life insurance, and state insurance boards monitor the rates that are charged.

Benefits of Group Life Insurance

For an employer, providing employees with the benefit of low-cost group life insurance can aid in finding and retaining the most talented people. Some group life insurance providers will underwrite policies for companies with five or more employees. Some of the advantages are: Premiums that the employer can deduct on his or her federal income tax, Protection for employees with families, Increased employee loyalty.

The employee usually has the option to name or change his or her beneficiary at any time. This is especially helpful for employees who have recently been married, divorced or widowed. In some cases, the insurance company will attach beneficial riders to the policy to further employee loyalty or to provide the employer with benefits he or she won't have to purchase separately. For example, disability benefits are often attached at drastically reduced rates, or even at no charge.

Federal Employees' Group Life Insurance (FEGLI) and Veterans' Group Life Insurance (VGLI)

In 1954, the United Stated federal government created the FEGLI program. It is one of the largest group life insurance programs in the world, covering more than 4 million federal government employees, retirees and their families. While some employers cover the full cost of basic coverage amounts, federal employees pay 2/3 of the cost of their basic coverage. The US federal government, or the American taxpayer, pays the other third.

Another large group insurance program administered by the federal government is VGLI. VGLI allows discharged and retired US service members to retain their life insurance benefits once their service term has ended. VGLI offers term insurance only. It does not offer permanent life insurance. Veterans can obtain up to $400,000 worth of coverage. However, coverage must be purchased in multiples of $10,000. Further, the total amount of coverage purchased cannot exceed the amount of coverage he or she had as an active duty service member.

Why Group Life Insurance is Affordable

Group life insurance, like group health insurance, is much less expensive for the insured not only because the group can negotiate better rates, but also because several large groups can join together to create an even larger group. The most important economic lesson of group life insurance is "economy of scale".

If a life insurance offers a group policy to one alumni or professional association, it can approach other alumni or professional associations and provide coverage for its members as well. The entire group may now have doubled. And while the amount of the premiums the insurance company receives can double, the cost to administer the policy won't double. Even though the company is taking in enough in premiums to cover its risk of paying a claim, it can now offer members of both groups lower premiums.

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