Life insurance pays a lump sum of money in the event of death to the designated beneficiary. As an employer, life insurance is an inexpensive and easy benefit to offer to your employees, and it can mean a lot to your employees if many of them have families or children.
In this article, we will explain:
- Should I Offer Life Insurance
- Benefits of Offering Life Insurance
- What Life Insurance Covers
- Costs of Life Insurance
- Types of Life Insurance and When to Offer Each
- How to Offer Life Insurance to Your Employees
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Should I Offer Life Insurance?
Life insurance is an easy benefit to offer as a small business owner. It’s both affordable yet valuable (costing around $36/mo for a 40-year-old employee), and it is easy to administer nearly on autopilot. There are a number of kinds of life insurance available, but the most popular one by far for employers to offer is called group term life insurance.
Group term life insurance is inexpensive and it also offers a tax advantage as the first $50,000 in employer-paid coverage is tax-free to the employee. It is also popular because you can stipulate the “term” of the plan; i.e. it only works when the employee is working for you and not after.
Benefits of Offering Life Insurance
As a small business owner, you might be wondering, even though it’s inexpensive, why you’d want to offer life insurance. The top reasons are:
- Good for employees with families — Life insurance is a valuable “just in case” element for employees with families; especially those in a single income home with small children.
- Easy to administer — Life insurance does not require constant monitoring and hopefully doesn’t generate many claims.
- Tax breaks for your employees — Providing life insurance as an employer is tax-free for up to $50,000 in coverage for your employees. There are also what’s known as “de minimis fringe benefits” available for small amounts of coverage if you paid for life insurance for your employees’ dependents or spouses, but providing that is not normal for a small business owner.
Drawbacks of Offering Life Insurance
Life insurance, like any benefits program, has a few cons:
- You have to process the life insurance claim, which is a bit morbid but it is a simple process that requires a death certificate and some paperwork.
- Your employees might not use it or appreciate it, so even though it’s a low-cost benefit, don’t just offer it— ask your employees first if it appeals to them.
What Life Insurance Covers
Most group-term life insurance policies offer either a set amount of insurance (such as $20,000 policy for each employee) or they are based on the employee’s annual salary (and usually pay up to 1, 2, or even 3 times the employee’s annual salary in death).
Life insurance carriers generally exclude some deaths, such as suicide, civil riots, death occurring during military service, and other events that vary by policy, so you will need to read the fine print.
Cost of Offering Life Insurance to the Employer
As an in-house HR Manager, I saw the premiums range from $18/month for young employees to up to $55/month for employees over age 50- clearly a huge saving from the marketplace. Below we show the average 2017 rates. You can also check out our article on life insurance costs in the marketplace.
2017 Life Insurance Costs
At the time of print, the average monthly cost of life insurance in 2017 was as follows (for a 20-year term policy at $250,000 coverage, per ValuePenguin):
- Age 25: $27.53
- Age 30: $27.88
- Age 35: $29.98
- Age 40: $36.03
- Age 45: $51.62
- Age 50: $76.58
- Age 55: $121.28
- Age 60: $207.70
- Age 65: $347.67
Types of Life Insurance & When To Offer Each
There are 5 kinds of life insurance plans:
1. Group Term Life Insurance
As we just discussed above, group term is the popular form of employer-provided life insurance since it is inexpensive, easy to administer, tax-free, and can be set to only the employee’s tenure with your company.
When To Offer This: Any employers, large or small, would benefit to offer this kind of life insurance as part of their benefit plan. However, if you have many young employees, it might not make sense or be utilized.
2. Permanent Life Insurance
Permanent life insurance policies build up cash value over time and are more expensive than group term. This can be a good option for a young, healthy person to build up a reserve over time, but it is very expensive for someone who is older.
When To Offer This: If you have a highly compensated but young to middle-aged group of employees, you might consider permanent life insurance. However, term life insurance makes more sense for an employer in general for ease of administration.
3. Whole Life Insurance
Whole life insurance is life insurance that can also function as cash in the case of an emergency. Whole life insurance covers you for your entire life as long as you pay the premium, although they are known to have little return on investment.
When To Offer This: We would not recommend offering whole life insurance as an employee benefit. This would be best done on an employee’s own accord in the marketplace.
4. Variable Life Insurance
The distinguishing factor of variable life insurance is that it allows you to allocate part of the premium you pay to an investment account. They can be made up of any “normal” investments like stocks, money market funds, or bond funds. Like any investment though, they are subject to market fluctuations, so this plan can even decrease in value depending on the stock market.
When To Offer This: We would not recommend offering variable life insurance as part of your benefits package. An employee should get this on their own in the marketplace.
5. Universal Life Insurance
Universal life insurance, similar to variable life insurance, has a separate account that you can allocate funds to. This one has a savings component that grows on a tax-deferred basis and consists of bonds, mortgages and money market funds, as invested by the insurance provider. Unlike variable insurance though, a guaranteed return is part of the policy, which usually is around 4%.
When To Offer This: We would not recommend offering universal life insurance through your benefits program and instead encourage employees to purchase a product like this on their own in the marketplace.
When employers look at life insurance, there are a few “sister” products that usually also come up.
Add-on Life Insurance Options
There are other types of insurance that you can offer in addition to (or beside) group-term life, including:
Group accidental death and dismemberment.
Commonly known as “AD&D,” this insurance pays benefits to an employee’s beneficiary if death occurs due to an accident or if the employee loses the use of portions of the body, like the loss of a limb. This could be an important additional benefit for your employees if you work in a dangerous industry like construction, or in a physical manufacturing environment with dangerous objects or procedures.
Business travel accident insurance.
This insurance covers only if an employee dies while traveling on company business. If your employees don’t travel or don’t travel more than 20%, this probably not worth your time or money.
Split-dollar life insurance.
This is a unique insurance plan that is usually reserved for key top employees in a company. It basically is a plan that lets an employee get life insurance using employer funds; those funds are then invested. If the employee dies, the employer (you) get the premiums back and the employee’s beneficiary gets the predetermined payout (usually $250,000+). If the employee leaves your business, you get the premiums back.
Personally, I’ve never seen this insurance type in the workplace from my HR experience and it is a complicated product complete with investment requirements. However, they are not subject to ERISA laws (retirement plan laws by the government), which is why they can be a big value-add for highly compensated executives at companies as a supplemental benefit.
How to Offer Life Insurance to Your Employees
Once you decide to offer life insurance, you need to figure out a few things, including who will provide it, who should be eligible to get it, and the process of rolling it out.
Step 1: Life Insurance Provider Options
There are 3 options for who to go to when you know you want to offer life insurance as an employer. They are:
- A Professional Employer Organization (PEO), like Justworks
- HR benefits software, like Gusto
- An insurance broker or insurance company, like Unum (which is the largest provider of life insurance in the USA and may be who your HR software or PEO also uses.)
Step 2: Eligible Employees
You also then need to decide which employees will get these benefits. You may want to offer group-term life insurance benefits to all your full-time employees, especially if you can get lower rates with more people. However, you can also offer it as a special benefit for key employees, as long as you do not discriminate who is selected for it (or you won’t be eligible for the federal tax break).
What does that mean? That means you need to draw the line in a non-discriminatory place, such as all employees are eligible after 1 year of service. Basically, you need to make sure at least 70% of your employees are eligible, so if you’re only offering it to managers, that would most likely be considered discriminatory.
Step 3: How To Make It Happen
For most life insurance policies, participating employees will need to tell your provider the following:
Designate a beneficiary.
The beneficiary is the person who will get the money. Sometimes the plan will allow people to designate several people as beneficiaries and the employee can split the percentage of the policy. This is an important part of the plan, especially if you have employees who go through a life change like marriage or divorce. Just like anything else, you will want to remind them yearly to update their information and check their beneficiary choice.
Proof of insurability.
Generally, with group-term life insurance, employees will not be asked to complete a medical questionnaire, which is a good thing for you as the employer.
If they do need to complete one for your policy— don’t look at it, don’t keep it, don’t touch it. Have your employees directly mail or email the questionnaire to the insurance provider in order to best keep you safe from medical protective laws like HIPAA and EEOC violations.
The Bottom Line
Life insurance can be an inexpensive, easy to administer, value-add benefit for a small business owner to offer their employees. You could pay for the benefit for them, or, since it’s so affordable, you could simply make it a part of your benefits package. Life insurance is worth a thought to offer, especially if you do not offer other benefits.
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