What is Group Life insurance?

Group Life insurance is the same concept as Individual Life insurance, in that the benefit is paid upon the death of the insured and is paid to a defined beneficiary. However, unlike Individual Life insurance, the employee has limited control over how much coverage is provided. The employer must decide if their goal is to cover funeral expenses with a low flat life amount, or to provide greater financial support to an employees family, for example with a larger flat life amount or multiple of salary coverage.

Life components:

There are many components of the Group life benefit. The following is not intended to be an exhaustive list, rather these are the most common components:

Volume:

How much the beneficiary is paid in the event of the employees death. There are two different methods for calculating the Group Life volume:

• Flat amount: Everyone in the class receives the same amount of Life benefit, regardless of their salary. There is typically a minimum amount of flat life insurance that the insurer will require, usually around $20k.
• Salary based: A multiple of the employees salary is used to calculate the amount of Life insurance. One or two times salary are the most common multiples. Note that the maximum amount would still apply (see below) so the actual benefit payment may be capped.

Group Life benefits often have a graded schedule, which means the volume is reduced once the employee reaches a certain age. For example, the life benefit may reduce 50% at age 70, or drop to a certain flat amount. There can be more than one reduction, for example, a reduction at age 70 and a further reduction at age 75. Employees typically require less life insurance as they get older, as expenses such as mortgages and children’s education are often paid off at this point. Having a graded schedule also helps to keep the rates down for Group Life. As Life is a pooled benefit the rates are calculated using an age volume distribution, which means having less volume on older employees helps to control the overall rate for that class.

Termination Age:

The age at which the Group Life benefit ceases to be paid. 75 is a common Group Life term age, but there is a great deal of flexibility regarding how high the termination age goes for Group Life, particularly if there is a reduction schedule. Note that the employee still needs to meet the plans eligibility requirements, for example they still have to be working the required number of hours. 

Non-Evidence Maximum:

The Non-Evidence Maximum (NEM) is the amount of Group Life coverage a carrier will automatically provide to all employees that are eligible. Any Life coverage in excess of the NEM will typically need to be medically underwritten on an employee by employee basis. Higher NEMs are therefore a benefit to the client as it will reduce medical underwriting. The size of the group and the average Life amount are the two factors typically used by insurers to determine the Life NEM, with larger groups and higher average Life amounts receiving larger NEMs.

The NEM is a major advantage of Group Life insurance over Individual life insurance. Because of the NEM, employees that would be ineligible for Individual life coverage for health reasons can still get Group Life coverage up to the Non-Evidence Maximum.

Maximum:

The maximum amount of Life benefit that will be paid out. This number only affects employees with Life volumes above the maximum. For example, if the Life volume is 2X salary and the maximum is $100k, then someone earning $40k a year won’t be affected by the maximum, but someone earning $55k would be (they would lose $10k of Life benefit). 

The maximum is commonly applied to the Basic and Optional Life amounts combined.

Rates:

Rates for Group Life are expressed per $1,000 of volume. For example, if the life rate was $0.20/$1000 and an employee had a flat $50,000 life benefit, then they would pay $10 a month for their life coverage (($50,000/1000) * 0.2 = $10)

While everyone in the same class pays the same rate, the monthly amount they pay will differ if the volume is salary based.

Premiums for Group Life can be covered by either the employee or the employer.

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Dependant Life:

While technically a separate benefit, the core concept is the same, only reversed. In the event that an employees dependants pass away, a small benefit is paid to the employee. Dependant Life is always a flat benefit, with a common setup being a benefit amount for the spouse or common law partner and half as much for any children that meet the definition of dependant. For example, the spouse may be covered for $10k and the children for $5k each. It is rare to see large Dependant Life volumes, the intention is to provide assistance with costs such as funeral expenses. 

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Optional Life:

Optional Life can be extended to the employees of a Group Life plan. Optional Life is purchased by the employees in addition to the Group Life coverage provided by the plan. Each employee can choose how much (if any) Optional Life to purchase. The key difference is that medical underwriting is usually required for all Optional Life, and Optional Life coverage is always paid for by the employee, not by the employer.

Optional Life may not be the best choice for employees looking to provide adequate life coverage as it is often not portable, meaning if the employee goes to work somewhere else they may not be able to bring their optional life coverage with them.