Ch. 15: Group Term Insurance

A lot of companies, banks, and other institutions offer group term insurance plans to their employees, customers, account holders, and members - as a perk. These plans offer financial security to the family of the covered employee/member in the unfortunate event of their death.

How do these group term plans work? Are they similar to individual term insurance plans? What are the benefits and features of these policies? Can you avail tax benefits on group term plans?

We answer these and a lot more questions - in this article. So, let’s begin!

What Is Group Term Insurance?

Group term insurance, as the name implies, is an insurance plan that covers an entire group of people under a single policy.

How Do Group Term Insurance Policies Work?

Similar to individual term plans, a group term plan will pay a fixed sum of money to your family if you pass away while the policy is active. Generally, employers, banks, NGOs, non-banking financial institutions, professional groups, etc offer group term plans to their -

• Employees
  
• Account holders
  
• Members of the institution/ group

The insurer provides one master policy to the group policy administrator or the master policyholder - that is, the employer, bank, or the organisation. The master policyholder pays the premiums to the insurer and issues the cover to all the members of the group.

Features Of Group Term Plans

Some features of group term plans you must know -

Generally, employers, banks, NGOs, non-banking financial institutions, professional groups, etc offer group term plans to their -

• A group term insurance policy is significantly cheaper than an individual policy.
  
• It is issued without any medical tests.
  
• It has to be renewed every year.
  
• The application process of a group term plan is very simple, when compared to an individual term plan purchased directly from the insurer.

Types of Group Term Life Insurance

• Flat Cover For All Members
  Under some group policies, a flat, uniform cover is offered to all the members. For instance, an employer will offer a flat term insurance cover to all its employees irrespective of their rank, salary level, etc.

• Different Cover For Different Members
  Here, different members are provided with different coverage levels. Basically, the master policyholder will grade members on the basis of several factors, and decide the cover amount accordingly.
  For instance, Siddhi and Amey both work in Company A. While Siddhi joined the company a few months back, Amey has been working at the company for the past 5 years. So, in this scenario, the company may offer a higher coverage to Amey, and a lower coverage to Siddhi.

• Group Plans With Add-ons
  Insurance companies also offer riders with some group term plans. Riders are add-ons that offer a payout under certain situations. A critical illness rider, for example, will pay a fixed amount of money if you’re diagnosed with an illness mentioned in the policy document.

Group Term Insurance - Eligibility Conditions

Preliminary Criteria

• The group offering the term insurance policy must not be formed with the primary intent of availing the insurance cover.
  
• You should be a member of the group.

Entry Age
Members will be eligible to get a group term cover if their age is 18 years or more. The maximum entry age ranges from 65 to 85 years - it may vary across insurance companies.

Group Size

• Informal groups, like groups of credit card holders, cultural groups, etc. should consist of at least 50 members.
  
• In case it’s a formal group, i.e., a company or an organisation, it should consist of at least 10 members.

Group term plan premiums depend majorly on the number of members and their age. Generally, the more the members, the cheaper the cost of the policy.

Should you buy a personal term cover, in case you have a group cover?

A group cover is not a personal cover. There are several drawbacks in a group cover to the extent that in our view, the coverage provided should not be even considered under the core financial security you must give your dependents. Consider this cover as a bonus. Why? Read on.

• Coverage Is Linked To Your Membership With The Group
  The group term insurance cover will stop as soon as your membership with the group ends. Meaning, if you leave your job, shift to another company, close an account with the bank, etc. your coverage will end too.
  

• Limited Customisation Options
  A group term life insurance policy has fewer features and customization options available than individual term insurance plans. You won’t have much say in which features and benefits to pick as the company, bank, or organisation will be in charge of managing the group term insurance policy.
  

• Cover Amount May Be Insufficient
  Policy negotiations will be controlled by the group administrator who’s offering the group term cover. This group administrator will be less bothered about offering you a cover that will be suitable for you or your family. Their main aim would be buying a policy that fits their budget. As a result, you may end up getting insufficient cover.

Can You Get Tax Benefits on Group Term Insurance?

Yes, you can get tax benefits on group term plans under two sections of the Income Tax Act, 1961.

• Section 80C
  If you’re paying the premiums either fully or partially for the group term insurance cover, you can get tax deductions on the premium you’re paying under Section 80C.
  

• Section 10(10D)
  If you pass away while the policy is active, the insurer will pay a fixed amount of money to your family. This amount will be exempted from tax under Section 10(10D).

Wrapping up!

A group term insurance policy offers coverage to a group of people under a single policy. Under some group term plans all group members are provided with the same level of coverage, whereas in others, different levels of coverage is offered to the members. Group term insurance plans come with several eligibility conditions as well as drawbacks - so, ensure you’re aware of them to avoid any hassles.