How Employee Group Life Insurance Works

Cindy Danielson

By Cindy Danielson

August 11, 2022

The life insurance industry in Canada is a trillion-dollar industry, and it’s growing drastically every year. As of 2019, Canadians owned $4.8 trillion in life insurance coverage and insurers paid $13.2 billion in benefits. But many people still don’t understand the importance of life insurance, or how it works. 

In this blog post, we’ll explain how life insurance works when provided by an employer as a part of a group benefits plan and the importance of owning life insurance to protect your family.  

What is Life Insurance?

Life Insurance, in general, is a way for people to protect their family against financial hardship in the case of death. The policy holder chooses their beneficiary (e.g. spouse, child) who would get a financial payout upon their death. Life insurance can help pay for a mortgage, child’s education, or even debt. 

You can get life insurance coverage two ways:

1.  Through your Employer as part of a Group Benefits Policy where Life Insurance coverage is common. Group life insurance is usually provided as term insurance which means the employee is covered by the policy while they are employed. Also read: Employee Health Benefits Coverage Types Explained in 5 Minutes.

2.  Purchased on your own through an Individual Life Insurance policy. Individual policies pay into a fund or pool, usually with monthly, quarterly or annual premiums. In return, your beneficiaries are paid a financial benefit to provide protection against unwanted debt. 
 
Quick Facts: 81% of Canadians with life insurance purchase individual life insurance privately through an advisor and the remaining 19% of Canadians have coverage through a group plan via their employer. 

Group Life Insurance

There are two different types of group life insurance that are offered:

1.  Employee Basic Life - This is the most common life insurance coverage. It provides coverage to the employee’s designated beneficiary if they pass away. Coverage is typically available with two options: flat coverage amounts (e.g. $25K, $50K benefit) or based on the employee's salary (e.g. 2x employee salary.)

2.  Dependent Basic Life - This coverage pays a benefit if any of the employee’s dependents pass away (e.g. spouse, child). The benefit paid is typically a flat amount (e.g. $5,000 child, $10,000 spouse) and is oftentimes used to cover funeral expenses. 

How Does Group Life Insurance Work?

Group Life Insurance is similar to other types of individual insurance plans in that you pay the premium and in return, your beneficiary will receive a financial benefit (payout) upon death.

However, with group life insurance, your employer pays the premium directly to the insurer and either deducts the monthly premiums through your payroll or pays the premiums for you resulting in no deductions from your salary.

Either way, with group life insurance, employees pays very little for a good amount of protection.

😮 Important Tip: In addition to the low cost, another BIG advantage of Group Life Insurance, compared to Individual Life Insurance, is that employees are not required to provide medical evidence, such as a medical questionnaire or blood test, to receive coverage. 

Financial Payout Upon Death

In the unfortunate case of death, the benefit amount paid to the beneficiary is based on an employee’s earnings or a flat amount. The employer decides the option, but they can also mix and match by specifying different coverage amounts for different classes of employees.

For example: an employer could specify Class A: Managers have coverage based on 2x their salary and Class B: Non-Management Employees have coverage at a flat $50,000.

Taxation for Group Life Insurance

When it comes to taxes:

  • Premiums paid by the Employer on behalf of the employee are a *taxable benefit to the employee. 
  • Premiums paid by the Employee are not a *taxable benefit to the employee.
No matter who pays the premium, the death benefit paid to the beneficiary is always tax-free. 

*Taxable Benefit is a non-cash benefit provided by an employer to an employee. The benefit premium is added to an employee's income which increases the employee's overall income and is then taxed accordingly (e.g. subject to tax and other payroll withholdings.)

Things to Consider

  • Employment Termination: Since Group Life Insurance is only available to employees, if/when an employee loses their job, changes jobs, or retires, they will lose coverage. However, Group Life Insurance policies typically offer a conversion option so if/when an employee leaves their employer, they can choose to convert their group benefits coverage to an individual policy, with no medical evidence, within 31 days of their employment termination date. 
  • Coverage Reduction: With many group plans, coverage will be reduced at the age of 65 and then terminated at age 70.
  • Additional Life Coverage: It’s important to note that the face value of a group life insurance policy may not be enough to cover the financial burden upon death on an individual’s spouse and/or dependent. Typically, people have an individual life insurance policy in addition to their group plan to minimize risk.

Simply Benefits Offerings

Simply Benefits offers both Basic Life and Dependent Life where the employer chooses coverage. Employees appreciate Group Health Insurance as it provides protection for their love one's and is an important part of an employee's total compensation to help employers attract and retain staff. 

If your an employer wanting more information about our benefits plans, contact us and we'll introduce you to one of our licensed Advisor partners.

Contact Us!

Final Thoughts

Whether you have insurance through your employer or privately, life insurance is an important way to provide protection to your family in the case of an unfortunate event. 

Questions about Your Life Insurance with Simply Benefits?

Contact your employer's benefits administrator or contact our support team.

Reach out to Support

References

CLHIA. “Canadian Life and Health Insurance Facts”, October 5, 2020. 

Additional Employee Resources

You may also be interested in these resources:

About Simply Benefits

Simply Benefits is Canada's newest Third Party Payor (TPP) that provides Employee Health Benefits 100% digitally through our Canadian Advisor partners. Our all-in-one digital solution provides three portals that enable Benefits Advisors to digitally manage all client plans online, Employers to efficiently administer employee coverage, and Employees to view, update and use their benefits 24/7 via desktop or smartphone app.

We help ENGAGE Employees Anytime, Anywhere, SIMPLIFY the Benefits Experience, and EVOLVE an Advisors’ Benefits Business.

Connect with us at simplybenefits.ca or on LinkedIn, Twitter, Facebook, Instagram, and YouTube.

Employee Benefits Made Simple. 

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