The What, Who and How Much of Offering Life Insurance
As an employer you are in a unique position to offer your employees an easy way to purchase a valuable benefit, costing them less than if they purchased it on their own. We’re referring to employer-sponsored life insurance. Your employees get the peace of mind that their loved ones will be protected from financial ruin if they die. But unlike an individual policy, a group life insurance plan doesn’t require a physical exam, which could be difficult for some individuals to pass. Employers often cover all of the cost of the premiums, making it a “free” benefit for employees. Plus, employees can convert a group life insurance plan to an individual policy if they leave the company. If you’d like to add life insurance to your employees ‘benefit package, here are some options to consider:
What
There are two kinds of life insurance —term and permanent. Under a group insurance arrangement, term life insurance covers employees until they leave the company, though it may be converted at that time into an individual policy if paid for by the employee, and it can also be offered to spouses and children. Term life insurance provides coverage only in the event of an employee’s death. Permanent life insurance, however, builds cash value and provides employees with coverage for the rest of their lives and can be converted to cash; it may also be offered to spouses and children. Employers generally provide employees with life insurance benefits equal or double their annual salary. Another popular approaches for employers to set a per-employee amount of coverage — for example, $10,000per employee.
Who
If you want to offer coverage to all of your employees, you might be able to get lower rates, especially if you have a large group. Remember that some insurers won’t provide coverage for companies with fewer than 10 employees, or may require more stringent underwriting. You also have the option to only offer life insurance to a select few employees. However, you won’t be able to deduct the premiums for federal tax purposes unless you meet special nondiscrimination requirements. Nondiscrimination requirements are designed to discourage employers from providing benefits only to the highest paid employees or providing benefits that are too expensive for lower compensated employees to participatein.For a plan to be nondiscriminatory, it must satisfy at least one of these conditions: at least 85 percent of all participating employees may not be key employees, the plan must benefit at least 70 percent of all employees, the plan must benefit such employees as qualify under a classification set up by the employer and found by the Secretary of Treasury not to be discriminatory in favor of key employees; or the plan must be part of a cafeteria plan properly defined by regulations.
How Much
Group life insurance is less expensive because the insurer faces less risk. Most employees will retire before using the benefit and it’s unlikely that everyone in the company will die at the same time. And, since group life insurance often is bundled with group health insurance, the insurance company’s sales and administrative costs are less. Many insurers require employers to pay the premiums for their employees. This ensures the highest percentage of employees will participate in the plan.