Group Life Insurance: What Is It and How Does It Work

Group or institutional life insurance is very common. It is a collective policy that protects a generally very large number of people. It is typically taken out by companies, organizations, unions or other entities that offer it to their members. It tends to be an interesting product, above all because it does not cost anything, or very little, for the final insured party. but it also has downsides that you should know about.

In this article, we will explain what group insurance is and how it works. Keep reading to find out how it can benefit you and what you should keep in mind if someone offers you an insurance policy of this kind.

Group Life Insurance: Table of Contents

What is Group Life Insurance?

How Group Life Insurance Works

Advantages and Disadvantages of Group Life Insurance

What is Group Life Insurance?

Group or institutional life insurance is a very widespread product in the United States. It consists of life insurance policies that are taken out by certain entities, generally companies, in order to insure large groups of people.

Although companies are the principal entities that take out these group insurance policies, it is also customary for them to be undersigned by unions or very large organizations. These entities negotiate the terms and prices of the insurance with the insurers, along with benefits, periods, and costs. Then, it is offered to their members or employees, who from that moment on, have life insurance that is fully or partially paid for by the company.

In general, this group life insurance is extra coverage that can be added to the medical insurance offered by companies and other institutions. In this case, it is about offering the families of the insured, or whomever the insured designates, some coverage that helps them overcome the possibility of the death of the insured—a trauma which, apart from everything else, can be a major financial disaster.

For the insured, group insurance represents a significant advantage. For very little or no money, you can have attractive coverage that offers security and confidence for the future of your loved ones in case of misfortune. In regards to companies and organizations, all types of them have an attractive argument to attract a potential new employee or member to maintain the loyalty of pre-existing employees or members, and also to indirectly improve their compensation.

Adding to the bargain, group insurance is quite cheap because the insurer assumes a limited risk: there are many people, so the risk is widely distributed and very low prices can be set. It can even be just a few cents daily per insured party.

If faced with the option to have group insurance through your employer or through another pathway, do not hesitate to accept it: it will cost you very little and give you a lot in exchange.

How Group Insurance Policies Work

If you are thinking that it would be a good idea to have this extra protection, you should know how group insurance works. As we explained earlier, the company (or other undersigning entity) comes to an agreement with an insurer to offer coverage to all members. In this case, life insurance guarantees that, upon the death of the insured, a payout will be made to the designated beneficiaries.

These life insurance policies are characterized by pertaining to a very specific type of insurance: temporary, term, or fixed-period insurance. These are policies with a determined effective period which, once it has passed, expire and are no longer in effect.

Term insurance is frequently used by people who want an instrument to give them security during a vulnerable period; for example, during their children's early years or university career. So, they take out term insurance for 5, 10, 15, 20 or 30 years, and once the period needing special protection ends, the insurance loses effect.

In the case of group insurance, the entities that take out the insurance opt for this kind for several reasons:

• Price. Term insurance is cheaper than permanent life insurance or other kinds. Because of its well-distributed risk, insurers lower the premium prices substantially, which results in low-priced insurance for everyone.
• Period. Short periods work well for companies: they can renew insurance policies more frequently, adapt them to the price and other needs of the personnel, as well as negotiate better with insurers. Very often, the policy is effective for a year and is renewed periodically.
• Turnover. If an employee leaves, or is fired, he or she simply ceases to be included as an insured and that is that. If the insurance were permanent, it could cause problems with the savings generated by the insurance and other complicated problems.

For the insured, the process is very simple. As opposed to other types of insurance, there is no qualification process, so you can avoid going through medical exams and other tedious access tests. The insured parties just receive the insurance and enjoy it. If your company offers you this type of coverage, make sure they give you a certificate that can act as the policy: it will be useful to prove that the insurance exists and is in effect.

From there, the only think you will have to worry about is choosing the beneficiaries properly and notifying the cost. In many cases, the insurance will be of no cost to you: it is included as just another part of your pay and your employer, or the entity offering you insurance, will be responsible for paying the policy.

In other cases, it is likely that you will be responsible for paying part of it. This will generally be a very small amount that will be deducted from your weekly or monthly pay.

Many insurers offer to complement or supplement group insurance with extra coverage where the insured is responsible for the price of the extras and the company pays the shared portion of the insurance. In these cases, clauses are added to extend protection. The most frequent clauses for supplementary insurance tend to be:

• Accidental death and dismemberment. Known as the abbreviation AD&D, this clause offers extra benefits due to accidental death or if the insured loses limbs and becomes handicapped due to an accident.
• Dependents. For a little extra, you can include dependent spouses and children in the policy of the insured party.
• Accelerated benefits. This clause allows for the death benefit to be paid out if the insured is given a medical diagnosis with a life expectancy of less than a year.
• Premium payment relief. With this clause, the insured is released from paying premiums if he or she becomes permanently handicapped. The insured stops paying, but maintains the benefits of the group insurance.
• Greater death benefit. With a little bit more money on your premiums, you can get greater coverage in case of death.

With these configuration possibilities, the insured can better adapt the life insurance to his or her needs. Either way, you must always inform the insurance company who the people chosen as beneficiaries will be if you die. It is also important that these people be aware of the designations so they can claim the payout if required. Either way, remember that beneficiaries always receive the money from the death benefit tax-free.

Advantages and Disadvantages of Group Life Insurance

As you can see, group insurance is interesting from many points of view, both for you and for your company or the organization or entity that you belong to. It offers options for improving your work situation, and of course, peace-of-mind. From our point-of-view, these are the main advantages of group life insurance:

• Cheap or free. Having practically free term life insurance is something anyone would want.
• No qualification process. You can save yourself the tedious qualification procedure, which may block your access in the end. This implies a great advantage for people having difficulties taking out an insurance policy due to their health condition or life style.
• Extendable. For a little more money, you can extend the benefits of your group insurance.

In exchange for these advantages, it is also necessary to mention a list of inconveniences caused by group insurance:

• Your company decides. The insurance is not yours; it is negotiated and held by whoever offers it to you. This means that that person can suspend it, or withdraw it, whenever they want. In addition, if you cease to belong to the company or entity, you immediately lose the insurance. This means that, even though group insurance is a very interesting option, it is always best to have another life insurance policy, whether permanent or term, that protects you and is owned by you.
  In some cases, contracts with insurers allow the insured to keep the insurance if he or she leaves the company, but in that case, the terms will change and the policy will be more expensive. The advantage here is that the insured can avoid taking out a policy from zero and going through the qualification phase.
• Limited benefits. Group insurance makes small payouts. They are generally not more than the equivalent of two years salary of the insured person. If you believe that you need greater coverage for your loved ones, do not hesitate to take out your own insurance and keep the group insurance as a complement.
• Non-guaranteed benefits. As is typical for term insurance, the payout is not guaranteed. It is only made if the insured passes away during the effective period of the life insurance.

As you can see, the advantages and disadvantages are quite balanced. In the end, the most important things is that group life insurance is offered at a minimum cost, while you are offered a coverage that, if minimal, is infinitely better than nothing. If you can get one, do not hesitate to do so. But remember that it is always advisable to take out more comprehensive life insurance on your own behalf.