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Group Term Life Insurance Often Is Annual Renewable Term Life Insurance

By Mike Heuer

Whenever getting life insurance from work or other group affiliation, that policy is a group term life insurance plan. And the most common type of group term life plan is an annual renewable term life insurance policy, which is renewed each year with premiums partly based on the number of people in the group being insured and does not take into account the ages, health or mortality tables typically used when underwriting term life coverage for an individual.

Normally, annual renewable term life plans are very expensive. But annual renewable group term life plans are much more affordable due to the risk being spread out, and many of the policies only offer a marginal amount of coverage for group members – usually enough to pay for funeral costs and short term bills, such as medical costs, that can arise when an insured person suddenly dies.

To qualify for group term life, the group already must exist and can be anything from a group of business employees, association members or club members, for example. And while a group can be created in order to qualify for group health insurance rates, the same is not true for group life insurance – even group term life insurance. When it comes to life insurance, a group cannot be created for the purpose of obtaining group term life rates. The group already must exist for a different purpose other than getting group life insurance rates.

Tax rates can be different for death benefits paid by group term life plans as well. While term life death benefits for individual policies are not taxed by federal or state governments, the same is not necessarily true for death benefits paid by group term life plans. Because an employer often pays the premiums on group term life policies for employees, the IRS will tax benefits exceeding $50,000 if the policy is considered to be carried directly by the job provider. A policy carried directly by an employer is one in which the employer pays all of the premiums.

Even if the employer carries the policy indirectly, the federal and many state governments will tax payouts above $50,000. An indirectly carried group life policy is one in which at least some of the cost is paid by the job provider, and taxes might be applied depending on the size of the death benefit. In addition to being taxed as income, Social Security and Medicare taxes also will apply to death benefits determined to be taxable by federal officials with the IRS.

While death benefits can be taxed, group life insurance is one of the most affordable and beneficial policies a job provider can offer employees. And when a member of another group, such as the American Legion, for example, group life rates also are very affordable and beneficial.

The amount paid by officials who provide group life benefits varies each year depending on the size of the group and its average age. And rates for group term life plans always are lower than what they would be for similar plans drawn for individuals.