Group Term Life (GTL) Insurance on a Paycheck: Understanding Your Employee Coverage

What Is Group Term Life (GTL) Insurance on a Paycheck?

Group term life insurance (GTL), which pays a benefit to your beneficiaries if you die, is listed on your paystub to show how much is deducted to pay for your coverage. While you can buy individual term life insurance, group term life insurance—usually a benefit offered to employees of a company—can be more affordable than individual coverage. If you elect this benefit, you’ll usually see the group term life coverage listed on your paycheck along with your other benefits.

Key Takeaways

• Group term life insurance is an affordable way to make sure your loved ones are financially protected if you die.
• As shown on your paycheck, group term premiums are usually low or fully covered by your employer. However, GTL coverage amounts may not be enough for your family’s needs.
• Group term life insurance can supplement your individual term life insurance policy or other employer-sponsored benefits without necessarily creating an additional financial burden.

How Group Term Life Insurance (GTL) Works

Group term life insurance protects your loved ones by paying them a death benefit if you die while your coverage is active. Many employers offer group term life insurance coverage as a benefit to their employees.

Because employer-sponsored group term life insurance is usually offered to all employees of the company, it’s typically more affordable than buying term life insurance as an individual, although it may have lower coverage amounts as well. You also won’t need to undergo a medical exam, as you usually do for individual term life insurance.

If you elect group term life coverage, you’ll see it listed on your paystub or other summary of benefits and deductions from your employer, along with the amount you pay each month in premiums (if any). Sometimes, the description is shortened to “GTL,” but it may be written out in full or noted in some other shorthand way, such as “life deduction.”

Your employer—and the benefits provider it chooses—will dictate the terms of your life insurance coverage. Group policies offer either a flat-rate benefit amount or one that is a multiple of your salary, albeit with a maximum coverage cap. Typical GTL coverage ranges from $50,000 to $500,000. 

Can I Convert My Group Term Life Insurance to an Individual Policy?

Your group life insurance coverage ends when the policy term ends or you leave your job. Group term policies are not portable: When you leave your employer, you’ll lose your coverage, However, you may have the option to convert your policy into an individual policy as long as you apply with the insurer within 31 days.

Note that the type of life insurance policy you can convert your group term policy into may differ from insurer to insurer. If you’re only allowed to convert to a whole life insurance policy, it will probably be more expensive than taking out a new individual term life policy.

How Is Group Term Life Insurance Taxed?

For group term life insurance coverage under $50,000, there are no immediate tax implications. Per your agreement with your employer, you’ll have your premiums deducted from your paycheck if you’re responsible for any costs outside of what your employer pays, and that amount won’t be part of your taxable income.

If your coverage is higher than $50,000, a specific amount determined by the IRS must be figured as part of your wages; this amount is taxable. The IRS assigns a monthly cost for every $1,000 of coverage in excess of $50,000, and the cost increases with successive age brackets.

Here’s how it breaks down.

Monthly Cost Per $1,000 of Group Term Life Coverage, Per IRS

Now, take the amount of policy coverage in excess of $50,000, divide it by 1,000 (because the cost is only calculated per $1,000 of excess), multiply it by the IRS’ cost for your age bracket, then multiply it by the number of months for which you’re receiving coverage (for simplicity’s sake, let’s say it’s a full year). That means if you’re 42 years old and receive $250,000 of group term life insurance coverage, your employer will need to include $240 ($0.10 x 200 x 12) minus whatever you paid in premiums on your W-2 as taxable income.

How Do I Choose the Right Amount of Group Term Life Insurance for My Needs?

Everyone’s needs are different. To estimate how much life insurance coverage you need, add up your debts and expenses (including some that may not have been incurred yet, such as college tuition for any children you may have). Then, compare those costs to the number of years you expect your income would be needed to help pay them. That’s likely the baseline level of coverage you need.

Advantages and Disadvantages of Group Term Life Insurance

The life insurance death benefit can help your family cover expensive bills if you’re no longer around to support them, including, but not limited to, mortgage, rent, medical expenses, and college tuition. That makes group term life insurance an attractive option if you’re not ready to pay for an individual term policy or if you don’t think you’d qualify.

Advantages of Group Term Life Insurance

• Group term life insurance is affordable, with rates as low as five cents per $1,000 of coverage. It may even be free for you if your employer covers the full cost.
• GTL is typically “guaranteed issue,” which means everyone who applies is approved. Pre-existing conditions won’t preclude you from receiving coverage or result in high premiums.
• Group term life insurance can complement other employer-sponsored benefits (such as health insurance and disability insurance) to maximize your financial protection.
• You can have both group term life insurance and individual life insurance policies.

Disadvantages of Group Term Life Insurance

• Group term life insurance tends to have lower coverage amounts, so it may not provide the right amount of financial protection you need.
• Group term policies aren’t portable, so when you leave your job, you may need to convert the coverage to a whole life insurance policy, which is typically more expensive. Plus, not all group term policies even allow conversion.
• Some group term policies reduce the benefit as you age, potentially introducing confusion as you try to figure out how much coverage you have.
• Some group term policies will increase your premium as you age, usually in five-year age groupings.

The Bottom Line

Employer-sponsored group term life insurance provides affordable coverage for employees and their families. Its lower costs, guaranteed qualification, and automatic payroll deductions complement other employee benefits, such as health insurance, to provide solid financial protection for your loved ones. However, GTL has drawbacks, including limited coverage amounts and a lack of portability if you leave the company. While it serves as a good basic safety net, you may need additional coverage to fully meet your dependents’ long-term financial needs.