What type of policy can group term life insurance normally be converted to

How employer-provided group term life insurance works

Employer-provided life insurance has become increasingly important in recent years. While Americans have traditionally owned more individual life insurance than workplace coverage, research conducted by the Life Insurance Research and Marketing Association (LIMRA) found that the opposite has become true – more Americans now have workplace coverage.2 Moreover, research from Guardian has found that 57% of those with life insurance obtain it exclusively from their workplace.3

When you get group term coverage, it's important to know that the protection provided isn't permanent. Like all term life insurance, it only provides a death benefit for a specific period of time. While some term policies can last as long as 30 years, group term coverage from your employer is typically "yearly renewable." In other words, the policy only lasts for one year but renews if you are still with your employer next year. Unlike permanent life insurance, there's no cash value component to the policy – it's designed purely to give your beneficiaries a payout if you die during the term.

Many employers provide two kinds of group term life to employees: basic and supplemental. Basic coverage is paid for by the employer, but it may be limited. It could be a specific amount (for example, $10,000) or tied to earnings (for example, 1X or 2X salary). Since the basic amount may not provide enough protection, many companies give employees the option to purchase a supplemental term life insurance policy on a voluntary basis. Since employers buy for many employees at once, these group policies can offer a number of advantages compared to a life insurance policy purchased by an individual:

• Lower premium payments  Group life rates are typically lower than those for a comparable individual policy
• Simple qualification  There's usually no need for a medical exam, and it's easy to apply for because your employer already has your personal data
• Easy payroll deduction  You never have to worry about making a payment – it's automatically taken out of your pay

The advantages of group term life insurance are easy to understand – especially if your employer provides basic coverage. However, before signing up for supplemental life you should find out a few things. You'll be able to get most of the information you need on your company's employee website, in your benefits materials, or by talking to an HR manager.

Portability

Portability means you can take your policy with you – and still enjoy the benefits of group life insurance coverage – if you leave your employer. Employer-paid life insurance may or may not be portable, but supplemental policies are usually portable. While non-portable insurance isn't necessarily a deal-breaker, you need to remember that you can only count on being covered for as long as you stay at your company. 

Taxes

Your employer is allowed to provide you with up to $50,000 of basic group term life income tax-free, meaning you don't owe taxes on the premium amount, and your beneficiaries won't pay taxes on the death benefit. However, premiums for any life insurance coverage over $50,000 are considered a taxable benefit and reported on your W-2 as "imputed income." This isn't necessarily a bad thing: since you're effectively paying taxes on the premiums, any death benefit will be paid to your heirs without being income-taxed.

Pricing

Basic employer-paid coverage is typically the most affordable: you pay nothing other than taxes after a certain point. And while you have to pay for supplemental group life coverage, it typically features attractive rates, especially for younger policyholders. However, rates increase with age, often in 5-year intervals. For example, rates may be the same per $1,000 of coverage for every employee less than age 30, then go up a bit for ages  30 - 34, and so forth. If you're not sure about the rates you're getting at work, you can easily get term life insurance quotes online for a quick comparison.

Eligibility

You may be subject to certain eligibility requirements – such as a minimum number of work hours per week – before you qualify for basic coverage. However, once you meet the requirement, signup is typically automatic.

Supplemental group term is a different story: signup isn't automatic because you have to choose an amount of coverage (see below). Companies set different rules, but if you don't opt for coverage when you're first hired, you'll typically have to wait until open enrollment sign up or add coverage. Many plans will also allow you to change coverage after certain life events, such as marriage or the birth of a child. Finally, while acceptance is usually automatic up to a certain amount, if you opt for a higher level of coverage, there may be underwriting: the insurance company will ask questions about your health and lifestyle habits and may require a medical exam. Depending on the results, the insurer may not offer coverage (or limit you to the automatic acceptance level).

How much coverage do you need?

Life insurance professionals will commonly recommend having anywhere from 5x to 20x your salary in life insurance coverage. If you make $75,000 a year, that's a death benefit between $375,000 and $1,500,000. Why such an enormous range? There are many things to consider when determining how much life insurance you actually need. For example:

• How much money would your family need — both short and long-term – if you passed away? What immediate expenses would they need to cover? And how much money would they need for the future?
• If you have children who are still at home, how much will it take to raise them and send them to college?
• If you have a spouse, do you want the death benefit to help cover their needs through retirement?
• Do you have a special needs child or a parent who needs to be provided for?
• Do you have substantial co-signed debts, such as a mortgage or student loans?

If you have a family, you probably want to help cover the extra costs they will face in your absence, especially while your children are still at home. The more dependents you have – and the younger they are – the more life insurance you may need. There are a few general rules that can help you start figuring out your life insurance need:

Human Life Value

Some financial representatives calculate the amount you need using the Human Life Value philosophy, which is your lifetime income potential: what you’re earning now, and what you expect to earn in the future. In its simplest form, the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits. As with every individual, the amount of recommended insurance you purchase depends on many factors. A simple way to get that number, however, is to multiply your salary times 30 if you are between the ages of 18 and 40. The calculation changes based on your age group, so please refer to the chart:

• Consider 10x your salary This is one of the simplest rules to follow, and it can provide a useful cushion for your family – but it doesn't take all your actual expenses and needs into account.
• Consider 10x your salary, plus college expenses If you add $100,000 - $150,000 for each child, that will help ensure they can achieve more of the opportunities you want for them. 
• Consider using the DIME formula DIME stands for Debt, Income, Mortgage, and Education. Total your debts, mortgage, and college expenses, plus your salary for the number of years your family needs protection (e.g., until the children are out of the house), and that's your coverage need.

Any of those methods are a good start, but there are more detailed online life insurance calculators that can help you arrive at a more accurate number. 

Other life insurance options to consider

Group term life insurance through work can be a valuable choice for all the reasons noted: it's easy to get, easy to pay for, and you'll enjoy favorable group rates. However, many companies don't offer life insurance benefits – and even if they do, the total coverage available (even with supplemental insurance) may not be enough for your needs. Fortunately, there are many other coverage options available.

Getting life insurance as an individual

Term life insurance is very easy to shop for and get on your own. Many insurance companies, including Guardian, make it simple to compare rates by giving you an instant online term life quote.  Most of the quotes you'll see are for level term life. These policies are typically offered with 10, 15, 20, or 30-year terms, and unlike yearly renewable term, premiums stay the same for the length of the policy. Those premiums may not be much higher than with a group term life plan if you're healthy. And coverage isn't dependent on your company or employment status – as long as you keep paying premiums, your policy will remain in force until the end of the term. 

An individual policy also gives you more options, starting with the fact that you don't have to get term coverage – you can opt for whole life insurance or universal life insurance. These policies are designed to provide permanent, life-long protection that also builds cash value4. And no matter which type of individual policy you choose, most insurance companies will also let you tailor individual policies with riders (optional provisions) that can provide valuable added benefits5. For example, many term life policies offer a convertibility rider that lets you change over to a permanent policy without getting a new medical exam. Permanent life policies are even more customizable.

If you decide to get an individual policy, it makes sense to talk things over with an experienced professional– like a Guardian representative – who can provide a more personalized assessment of your needs and tell you about all your coverage options. And since you'll have a choice of insurance companies, make sure to look for two things: 

• Financial strength - You want to be confident that the company will be around when your family needs a payout years down the road. So, look for insurers with strong Financial Strength Ratings (FSRs), like Guardian6.
• A company that underwrites its own policies - Some companies sell policies from another insurer. This can add costs and an extra layer if you want to convert your policy to permanent coverage – or down the road when your family needs a payout.

Frequently asked questions about group term life insurance

How does group term life insurance work?

This is a term life insurance policy that you get as part of a group – typically through work. You can also get it is as part of a professional organization or member group. Because you're one of many people buying coverage together, the rates are typically lower than they would be for the same amount of coverage purchased as an individual. These types of policies often have automatic or simplified acceptance up to a certain amount, so they can be easier to qualify for without the need for a medical exam.

Is group term life insurance a good idea?

Group life insurance can be an affordable coverage option that's also easy to get, but you should also be aware of the limitations. For one, it's term coverage that is not permanent and doesn't build cash value. Secondly, if you leave the group or company you get it from, you could lose coverage if the policy isn't portable. Finally, the amount offered may be lower than you could get with an individual policy.

What is the difference between term life insurance and group life insurance?

"Term" and "group" refer to different aspects of a policy. A term policy is one of two basic life insurance types: life-long permanent coverage is the other. Separately, there are two basic ways to buy life insurance: individually or as part of a group. Most group life policies are actually a form of term coverage.

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