Understanding Life Insurance and Critical Illness in Group Plans

Executive Summary

Life and critical illness insurance are foundational pillars of Canadian group benefits plans—but also among the least understood by both employers and employees.

Many plan sponsors treat them as “check-the-box” benefits: flat coverage, little employee awareness, and no review of pricing, eligibility, or relevance. Yet these coverages can:

• Prevent financial catastrophe for families

• Attract and retain talent

• Drive real perceived value when communicated clearly

In this article, we’ll break down:

• How life and critical illness insurance work in group plans

• Common plan design structures

• Tax, pricing, and pooling considerations

• Voluntary and optional benefit models

• Communication best practices for employee uptake

• What to review and improve during your next renewal

1. Why These Benefits Matter—Even When They’re Rarely Used

While only a small percentage of employees will claim on life or CI during their careers, these benefits provide:

• Peace of mind for employees and families

• Financial protection in life-altering situations

• A core foundation of a responsible total rewards package

• Protection against devastating out-of-pocket costs

Employers that clearly explain these benefits boost trust and perceived fairness—especially among younger and lower-income workers.

2. Life Insurance Basics in Group Plans

Group life insurance typically includes:

• Basic life insurance (employer-paid)

• Optional life insurance (employee-paid, extra coverage)

• Dependent life insurance (minimal coverage for spouse/children)

Plan design options:

• Flat amount (e.g., $25,000 or $50,000)

• Salary-based (e.g., 1x or 2x base earnings)

• Combination with maximum cap (e.g., 2x salary to a max of $500,000)

Key features:

• Coverage ends on termination or retirement

• Often convertible to individual policies at group rates (for a limited time)

• No health questions required for basic amount at initial enrollment

3. Critical Illness Insurance: A Growing Coverage Trend

Critical illness (CI) pays a lump-sum, tax-free benefit upon diagnosis of certain major illnesses (typically 25+ conditions), such as:

• Cancer

• Heart attack

• Stroke

• Kidney failure

• Organ transplant

Group CI is almost always voluntary, and:

• Often purchased by employees at low group rates

• May be embedded in flex or modular plans

• Can be extended to spouses and dependents

• Is not tied to income or ability to work—payout is based on diagnosis

4. Typical Plan Design Models (Flat, Salary-Based, Tiered)

More flexibility increases employee satisfaction—especially when paired with optional add-ons.

5. Optional and Voluntary Life & CI Coverage

Optional life and CI allow employees to:

• Top up employer-paid coverage

• Add family coverage

• Buy coverage at group rates without needing a full medical exam (within limits)

Employers may offer:

• Optional life up to $500,000 or more (often EOI required)

• CI up to $25,000 or $50,000 per person

• Payroll deduction for easy access

These are low-cost, high-perceived-value options—but only if communicated properly.

6. Taxation of Group Life & CI Benefits

Key takeaway: Employees are taxed on premiums if the employer pays, but payouts are tax-free in most cases. CI is almost always tax-free.

7. Evidence of Insurability (EOI): When It’s Required

EOI is a health questionnaire (and sometimes medical exam) required when:

• An employee enrolls late (after 31 days of eligibility)

• Coverage exceeds non-evidence maximums (e.g., >$250,000 life)

• Voluntary top-ups are requested

Employers should:

• Educate employees on when EOI applies

• Encourage early enrollment to avoid barriers

• Work with insurers to negotiate high non-evidence maximums (NEMs)

8. Insurer Pooling and Pricing Strategies

Group life and CI are typically pooled benefits, meaning:

• Premiums are based on demographic risk and overall claims in the pool

• One large claim won’t dramatically affect future pricing

• Rates are blended across industries and sizes

For life insurance:

• Rates increase with age (5-year bands common)

• Annual renewals reset based on volume and claims

For CI:

• Voluntary benefit pricing is more stable

• Low claims incidence makes it attractive to offer

9. Communication Tips to Increase Perceived Value

Employees often underestimate the value of life and CI coverage unless it’s communicated effectively.

Best practices:

• Highlight payout examples (e.g., $250,000 = mortgage paid)

• Compare costs to retail (group rates = 50–70% lower)

• Use employee stories (real or anonymized)

• Run annual voluntary enrollment campaigns

• Include in total compensation statements

A $5/month voluntary benefit can feel like a $500/month raise if it protects a family from financial disaster.

10. Benchmarking: What Leading Employers Offer

Also common:

• Spousal and dependent life ($5,000–$10,000)

• Annual reviews to increase NEMs

• Portable voluntary life/CI upon termination

11. Red Flags and Common Mistakes

• Offering only flat $25,000 coverage for all employees

• No optional top-up options (or poorly promoted)

• CI offered but no employee education or enrollment window

• No clarity on tax implications in paystubs or handbooks

• LTD and life overlap/conflict (e.g., life ends when LTD starts)

Fixing these issues takes minimal cost but dramatically improves value and clarity.

Final Thoughts

Life and CI coverage are the quiet backbone of group benefits.

Employees may never need to claim—but if they do, the support will be life-changing.

Make sure your plan isn’t just checking the box. Design it clearly. Communicate it honestly. Offer flexibility. And review it annually with your broker or consultant.

If you’d like help benchmarking your plan or enhancing your communication strategy—we’re here to support you.