What Is Group Universal Life Insurance?

As employers compete for top talent, many companies have expanded their benefits packages to include perks such as life insurance, and one common workplace offering is group universal life insurance. In this article, we'll take a look at what advantages these plans may offer workers and discuss questions you may want to ask before purchasing a plan.

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How Does Group Universal Life Insurance Work?

Group universal life insurance is a type of permanent coverage that’s commonly offered through an employer or a membership-based organization. Policies, which are often part of a comprehensive benefits package, can typically be purchased at a lower group rate, and premiums may be paid in full by the employer or split between the employer and employee. If the employee contributes to premiums, payments are generally made through pretax payroll deductions.

Group universal life insurance plans have two main features: a guaranteed death benefit and a savings component with a fixed interest rate. Through the savings component, policies accumulate value over their lifetime, and policyholders may withdraw or borrow from the cash value without incurring tax penalties.

If your employer or professional organization offers group universal life insurance as part of its benefits package, your coverage amount will typically depend on three factors:

Your base salary
Your overall financial situation
Your beneficiaries’ financial needs

The amount of coverage you’re approved for reflects the death benefit payout, which is issued to your beneficiaries upon your passing, as long as premiums have been paid as contracted. And because these plans are designed to insure large groups, premiums are typically lower than for policies purchased individually. Coverage may also extend to spouses and other dependents.

As premiums are paid, these policies accrue a cash value in a dedicated savings component, which may either collect interest at the current money market rates or guarantee policyholders a minimum interest rate. In most universal life plans, this cash value begins to accrue after about a year. Policyholders may contribute to this savings account via lump-sum deposits or additional premium payments, which may be made through payroll deductions. Extra payments may be stopped, started or changed at any time.

As the cash value increases, policyholders may withdraw or borrow against funds, or leave the funds untouched. Depending on the plan, any cash value remaining when the insured individual dies may be distributed to the beneficiaries, or it may be forfeited to the insurance company.

Some plans also pay out yearly dividends, as determined by the insurance provider’s board of directors. These dividends, which often fluctuate from year to year, may be taken as cash or used to reduce premiums or purchase additional coverage.

Are There Advantages to a Group Universal Life Insurance Policy?

Because purchasing an individual life insurance policy is often costly, group insurance through an employer or organization can be an affordable way to protect your family’s financial needs. Additionally, group policies sometimes have more relaxed underwriting guidelines than individually purchased policies, making it easier for high-risk individuals to get coverage, and many workplace plans don't require medical exams or extensive health questionnaires prior to approval. Some employers may also offer workers the option of purchasing additional coverage through riders and may make policies available to employees’ spouses or other dependents.

These group plans also provide all the standard benefits of an individually purchased universal life insurance policy, including a flexible death benefit and premium payments and a cash value that can be withdrawn, borrowed against or used to reduce the monthly premiums. Additionally, because the savings component accrues cash on a tax-deferred basis, both the policyholder and the beneficiaries may reap tax benefits.

Are There Disadvantages to a Group Universal Life Insurance Policy?

The disadvantages to a group universal life insurance policy may depend on the plan your employer is offering and the provider it’s offered through. Group plans typically aren’t as customizable as individually purchased policies and often offer only limited coverage amounts. Although it may be possible to increase the death benefit, adding value to the plan may come at a significant cost. Additionally, group policies aren’t always portable, so if you leave your job, retire or are terminated, you may lose your coverage completely.

These group policies also share the disadvantages of an individually purchased universal life insurance plan, including complexity. Because the death benefit and premiums are flexible, they typically need to be managed, and some plans require policyholders to make investment choices, which can affect the success of the cash value component.

What Is Group Variable Universal Life?

Group variable universal life is a specific type of universal life insurance policy offered by employers or membership-based organizations. VUL plans are similar to standard universal life policies in that they have a built-in savings component and flexible premiums. However, a VUL’s savings component functions more like a mutual fund in that the investment is exposed to market fluctuations. That means policyholders have the opportunity for higher returns than standard universal life plans, but they're exposed to greater risk.

What’s the Difference Between Universal Life and Whole Life Insurance?

Both universal and whole life are types of permanent life insurance policies, guaranteeing a death benefit payout as long as premiums are paid in full. Both types of plans include a savings component.

However, these plans different in one major aspect: flexibility. While whole life insurance offers fixed premiums and a guaranteed death benefit amount, variable life policies are designed for flexibility, letting policyholders adjust the premiums and the plan’s face value to suit their changing financial needs.

What Should You Ask Before Signing Up for a Plan?

Purchasing a group life insurance plan can be an affordable way to secure coverage for your family. However, it’s important to understand what’s being offered before you sign up. It may be helpful to ask questions, such as:

How much coverage can I get?
Will I need to undergo a physical or answer health-related questions prior to approval?
Is there a waiting period before coverage begins?
Is the policy portable?
Can I enhance my coverage through riders?
Does the plan offer living benefits such as a critical illness clause?
Can I cancel the policy if I no longer want coverage?

Your HR department, your benefits manager or a representative from the insurance provider should be able to answer these and other questions about this workplace perk.