Life Insurance

Should I Buy Group and Supplemental Life Insurance?

Should I Buy Group and Supplemental Life Insurance?

Group and supplemental life insurance is regularly offered by organizations and employers as a member or employee benefit. If your employer offers a certain amount of group life insurance at no cost, you should take advantage of it, even if you have sufficient individual coverage.

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However, if you’re relatively healthy and can qualify for reasonable rates elsewhere, we wouldn’t recommend purchasing supplemental life insurance. Supplemental life insurance is typically only a good choice if you have pre-existing conditions or for some reason can’t purchase an individual term life insurance policy.

What is Group Life Insurance?

Group life insurance is simply life insurance that is provided through an organization to a pool of people. Though life insurance coverage is provided through an organization, you get to choose the beneficiary, which can be your spouse, child or any loved one. You may have access to group life insurance through:

  • Veterans Affairs, if you served in the armed forces
  • An association, such as the AARP
  • Your church
  • Your employer, whether they’re private or part of the government (as in the case of Federal Employees Group Life Insurance)

Group life insurance through your employer will typically be provided as a multiple of your salary and will have two types of coverage: basic and supplemental. Basic group life insurance is the amount available to you as an employee benefit at no cost. Supplemental group life insurance is any amount of additional coverage you purchase through your employer. We recommend that you opt-in for any amount of basic group life insurance that is provided, as it offers additional financial protection to your family without you needing to pay premiums.

Since group life insurance is purchased by the organization from an insurer, the association or your employer is essentially the policyholder. One of the downsides to this is that, if you move to a new job or stop paying dues, you may lose access to the life insurance coverage. In addition, you may be limited in the amount of insurance you can purchase.

However, basic group life insurance is typically guaranteed issue, meaning you can’t be denied coverage if you’re unhealthy or a smoker. This can be incredibly valuable if you’re older or would have trouble covering the cost of insurance elsewhere, as coverage can multiply in cost if you’re not healthy.

What is Supplemental Life Insurance?

Supplemental life insurance, also called voluntary supplemental life insurance, refers to any group life insurance you purchase on top of what is offered by your employer. Payments are typically handled by your employer deducting the premiums from your paycheck. Depending on the insurer your employer works with, you may be able to purchase supplemental life insurance for yourself, your spouse and your children.

Whether you should purchase supplemental life insurance through your employer is primarily dependent on your health. Simply put, if you’re healthy or young, you are very likely to get better rates purchasing an individual life insurance policy (which also provides more options for coverage). On the other hand, if you need more life insurance than is provided as basic group coverage and have had trouble being approved for an individual policy, you should purchase supplemental life insurance.

Supplemental life insurance premiums are higher because the insurer has very little information about your health. Therefore, they may require “evidence of insurability” if you want to purchase a large amount of coverage, as it’s not guaranteed issue like basic group life insurance. Demonstrating insurability can include answering health questions, allowing the insurer to review your medical records or submitting to a medical exam.

While you can typically purchase significantly more supplemental life insurance than your employer would provide as basic group life insurance, the maximum is usually lower than you would be able to purchase through an individual policy. In addition, the amount of supplemental coverage available to your spouse is typically fixed as a percentage of your coverage or a particular dollar amount.

Types of Group Life Insurance Policies

Group life insurance is typically provided as annually renewable term life insurance so coverage will expire within a year of you leaving your employer or organization. Premiums paid by your employer, or you if you purchase supplemental insurance, are primarily determined based upon which age group you fall into (such as 30-34 or 35-39). Some insurers, such as MetLife and Prudential, also offer other types of group life insurance for companies. This can include group universal life insurance, whole life insurance, or accidental death and dismemberment insurance.

While basic group term life insurance typically is terminated when you leave your employer, supplemental coverage and permanent policies may be portable. This means that, if you decide to leave the company, you’ll be offered the option of converting your coverage to an individual policy under the same terms. Though the option of conversion is usually guaranteed, no matter your health, this also means that premiums will be significantly higher than simply purchasing an individual policy if you’re in good health.

Whether you should keep your group life insurance coverage when leaving an organization depends on your policy and health.

  • If you’re fairly healthy or young, you should compare rates from insurers, as you’re likely to find better quotes for comparable coverage.
  • If you had term supplemental insurance coverage and would have trouble gaining access to comparable rates elsewhere, you should convert your policy.
  • If you had permanent group insurance, you need to determine the policy’s cash value and check the terms of your contract. Even if you’re unhealthy and the policy has a significant cash value, keeping the coverage may not be your best option as permanent policies are quite expensive. In addition, you may simply have your coverage canceled if your employer changes insurer later on, since the employer may still be the contract holder. This means you could pay high premiums for years and be left without coverage.

Taxes on Group Term Life Insurance

Similar to an individual life insurance policy, your beneficiaries generally wouldn’t pay income taxes on the policy’s death benefit if you pass away. However, you may have to pay taxes on the value of your group and supplemental life insurance, as this can be considered part of your income.

In most cases, if you have less than $50,000 of group and supplemental term life insurance through your employer, you won’t have any associated income taxes. Any group term coverage above $50,000 is assigned a fair market value by the IRS. If you pay less in premiums than this fair market value, the difference is considered as part of your income and you would pay taxes on it.

As an example, say you’re 50 years old and have $150,000 of combined group and supplemental life insurance through your employer, $100,000 of which is supplemental coverage. You would deduct $50,000, so the amount of coverage to be assigned fair value would be $100,000. A 50-year old would be assigned a value of $0.23 per month per $1,000 of coverage, so your life insurance would be given a total fair market value of $230 per month. If you already paid $200 per month for supplemental coverage, then you would be considered to have $30 per month of additional taxable income.

It may seem odd to have to pay taxes on coverage that you already pay for. A fair market value is assigned to compensate for situations where an employee receives significantly discounted premiums by having their risk pooled with healthier people.

There are some exceptions to this calculation. For example, if your spouse or children have over $2,000 of life insurance, the total cost of their coverage could be considered as taxable income. And, if the company offers different amounts of life insurance to certain segments of employees, you may have to pay taxes on the full cost of coverage if you’re an officer or significant owner of the company.

Maxime Croll

Maxime is a Director at ValuePenguin focusing on the insurance industry. Previously she was the Director of Product Marketing at CoverWallet, a commercial insurance startup, and helped launch NerdWallet's personal insurance business. Maxime has contributed insurance insights and analysis to Forbes, USA Today, The Hill, and many other publications.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.