Free Cover Limit in Group Term Insurance Policies – All You Need to Know

Let’s discuss a few things in detail that you should know about it: 

What is Group Term Life Insurance? 

Group Term Life Insurance is a type of policy that is issued for 1 year and it can be renewed every year by the organization or the employer. In the case of employee-employer groups, the group policy is assigned in the name of an employer. The employer looks after the policy’s administration and collaborates with the insurance company for the addition and elimination of employees from the group term policy and also from the claim management. 

The organization pays a fixed amount of premium for all their employees and provides either a graded or flat cover to them. For Instance, all employees under group term insurance policies may receive a flat SA of Rs. 5 Lacs each or allocation of SA 5 lacs, 7 lacs, 10 lacs, and so on depending on their designation or grade ranges. The sum assured is also linked to the salaries of an employee in some cases, for example, the coverage could be 3 times the annual CTC (Cost to Company) of the employee. 

Note: Now that you know that what is Group Term Life Insurance, you should also get to know about what is term insurance to buy a term plan for your loved ones.

What is a Free Cover Limit? 

Group Term Life Insurance policies work on the idea to cover a large group of people at minimum rates. So here, the free cover limit comes into importance. Free Cover Limit (FCL)is a sum assured level that is provided to an employee of an organization without insisting on medical examination or looking for evidence of good health. There are a number of factors relating to group members that should be taken into consideration while calculating FCL: the number of members, average age, historical growth rate, and past experience of mortality, if available. 

For instance, for 1000 employees group with age below 65 years, the free cover limit of Rs. 50 lacs may be offered by the insurance company. 

How Does Free Cover Limit (FCL) work? 

FCL does not get you a life insurance policy for free. Simply put, if a group member has a sum assured that is lower than the value of FCL, then he/she is offered life insurance without any requirement of underwriting, providing he/she is actively at work. For employees who are not active at their work and are below FCL, life insurance is provided only after they recommence their work. 

Individuals who are above the free cover limit have to undertake some underwriting needs. It could be a questionnaire, a good declaration of health, or even medical examinations. The insurance company also specifies some age restrictions or age limits, above which the health test is mandatory. 

Let’s understand this with the help of a simple example: 

If an employee whose eligibility for sum assured is more than FCL and is requested to go for medical tests and he/she refuses to do tests. In such situations, an employee’s life cover is capped at the free cover limit. 

If an employee is required to undergo medical tests and the results are adverse such as he/she is found to have a critical illness. In such cases, the acceptance of a proposal with medical situations beyond the limits of FCL depends on the underwriter, sum insured, and the criticality or severity of the medical condition. 

Free cover limit sum assured is granted to all the employees under a group term life insurance policy without seeking any individual-specific details from them. 

Note: It is suggested to calculate the term plan premium on the term insurance calculator online tool by Policybazaar before buying.

Top-Up Plans 

Additional or add-on covers are also provided by some employers over and above the available sum assured through mandatory enrolment for the employee-employer group. These types of covers are optional and called top-up covers. Usually, FCL is not offered to these types of top-up covers. In such cases, the insurance company requires health questionnaires, good health declarations, or medical tests. 

If the sum assured of an individual is higher than the free cover limit and the insurer requests for additional underwriting needs, then it is a smart decision to disclose all facts in good faith and avail of the cover. Group term life insurance covers are comparatively easy to avail. 

Which is Better – Group Term Insurance Policy or Individual Term Plan? 

Group Term Life insurance is usually less expensive and easy to understand, but it is associated with your employment. In case you quit your job, you can lose your employer-offered life cover. Experts suggest buying an independent and individual term insurance policy. In an Individual term policy, you pay the same amount of premium for the plan term. Whereas in a group term policy, the premium amount may change each year during renewal, depending on the experience of mortality of the company. In these unprecedented times of COVID-19 of adverse experience of mortality, group term policy premiums are increasing and insurance companies have turned conventional while mentioning FCL costs. Therefore, purchasing a group term insurance policy for yourself after considering your existing insurance will increase your family’s financial security.