Buying group term life insurance can be taxing on the mind and on the wallet, but it doesn’t have to be. With the right plan in place, you’ll know that your family will always be taken care of without paying more than you need to. Take a look at these five things to consider when buying group term life insurance.
Group term life insurance can be an excellent way to provide financial support for your family should you pass away prematurely or develop a serious illness. But buying group term life insurance can be tricky, especially if you’re responsible for supporting others financially and don’t have an income of your own to contribute towards the cost of the policy. Here are some things to consider when buying group term life insurance to help you make the best decision possible.
Taxing Group Term Life Insurance
The Affordable Care Act (ACA) taxes individuals who don’t carry health insurance—unless they qualify for an exemption. An exemption usually means your income is low enough, or you have a hardship that prevents you from buying insurance. But, there’s one exemption that has nothing to do with your income or medical status: If you have group term life insurance through your employer or union, and that coverage meets certain requirements, it will exempt you from paying a tax penalty.
The Cost
Individual life insurance can be expensive, but with group term insurance, you're purchasing coverage for a large group of people. Because of that larger scale, you typically get better rates on your policy than if you were on your own. Plus, once a plan is in place (and paid for), there's a little additional cost involved other than replacing those that pass away. According to Charles Jaffe at The Wall Street Journal, group term life insurance is less costly than individual policies because it costs less per person and entails no medical underwriting or required physicals—two areas where premiums increase significantly with age.
The Perks
First, group term life insurance is much less expensive than individual coverage. For example, as a single person in his early 30s, I pay $1,153 per year for a $500,000 policy with Northwestern Mutual. My wife and I pay $2,018 combined for a $1 million joint policy—much less than what it would cost us to get coverage separately.
Plus, your employer can sometimes contribute money toward your premium (which is essentially like getting paid on your life insurance). That contribution can be considered part of your salary and therefore may be tax-free.
Age
Most employees sign up for group term life insurance as part of a voluntary benefits package, and it's usually extremely affordable. To get quotes and shop around, check with your HR department or contact a local independent insurance agent who works with businesses in your area.
As with any insurance policy, there are a few key things you'll want to consider before signing up for group term life insurance: how much coverage you need, how long you need coverage, and whether you can keep your plan in force after changing jobs.
What you get for your money
The first thing you need to do is decide if you want group term insurance, which is essentially identical coverage for every employee, or individual term insurance. If there are a lot of young people in your company, that usually means getting group term because that's usually cheaper for them.
You may have heard about buying group life insurance being tax-deductible; that's only true if you buy it through your employer. Individual life insurance would be taxable because you're buying it on your own.
Signing Up
Before you sign up for group term life insurance, be sure you’re actually buying it. You may have an insurer approach you about special coverage that isn’t necessarily a good deal. On the other hand, if your employer or union offers coverage at little or no cost, it may be in your best interest to sign up—but only if you can get a rider on your policy that will let you buy additional coverage on your own terms. Generally speaking, most people are better off paying for their own coverage through individual policies purchased from reputable insurers than taking what amounts to free junk from their employers and/or unions.