The Basics: Offering Life Insurance to Your Employees
Offering employer-provided life insurance policies for employees as part of your benefits package can be a great recruiting and retention move. Regardless of your employee’s career ambitions, most of your employees will be working to provide for their families, parents building a future for their children or adult children looking to take care of their elderly parents. In addition, employee life insurance gives people an attractive extra incentive to either join or stay with your company, protecting those loved ones should some tragedy occur.
Knowing the importance of offering life insurance for your employees is crucial. This blog will outline the basics of what you should know as a decision-maker at your company.
What is employer-sponsored coverage?
Employer-sponsored coverage can be offered in a variety of ways. However, employers most often offer a term policy for their employees. There are also opportunities for permanent policies or even universal life, which is a combination of term and permanent insurance. Cost-sharing of the premiums also varies, as some employers choose to cover the full cost, some require employees to pay the full premium and others choose to split the cost with employees.
A common scenario is an employer offering a group-term policy at no cost to the employee, with a coverage amount that is a multiple of annual salary (usually one to five times annual pay). Group term policies often end when an individual is no longer employed by the policyholder, but some covered employees may be able to convert the face amount, or a portion thereof, to a permanent policy upon leaving. This is generally an affordable plan for employers to offer, with generally low premiums and high face amounts.
Many employers who offer such a group-term policy also offer additional voluntary term coverage options, in which the employee pays the full cost but still realizes the benefit of group rates and payroll deductions. Additional coverages offered may include:
- Spouse/dependent life insurance
- Supplemental term life insurance (to elect a higher amount than the employer offers)
- Supplemental permanent coverage (a whole, universal or variable life policy in addition to the term policy)
- Accidental death & dismemberment (AD&D) coverage
How does this impact employer taxes?
Premiums for employee life insurance offered by the employer are generally deductible as ordinary and necessary business expenses (unless the employer is the beneficiary of the policy). In addition, the cost of employer-provided group-term life insurance is excludable from the employee’s gross income (up to $50,000 of coverage). However, this plan must meet special nondiscrimination rules, or tax implications may result.
How do I share this benefit with employees?
Though life insurance is an important asset for future financial security, many employees don’t realize its importance. Teaching employees about the value of life insurance may increase loyalty to the company as they better appreciate this benefit as part of their financial wellness package.
Ask employees to envision the debt and financial responsibilities that loved ones would face in the event of their death. If the employee is the primary household income earner, how will the family support themselves? If the employee dies and leaves behind a mortgage or substantial medical bills, who will have the burden of paying that debt? Many employees do not realize the financial benefits of a life insurance policy until they think through these issues. If you offer a permanent coverage option, also explain the value of having the cash benefits component to the policy.
Emphasize to employees that buying life insurance on their own is costly; even if your group coverage is employee-paid, you are still offering significant advantages:
- Rates are typically lower through a group policy than if buying individual life insurance coverage.
- Generally, no medical review is required for group policies, as opposed to individual policies, where an unfavorable medical exam could disqualify the individual or trigger extremely high premiums.
- Group life insurance offers the convenience of payroll deductions for premiums.
Educating employees on the benefits of life insurance in general and the advantages of purchasing through your group plan can help increase awareness and participation, boost loyalty and support hiring and retention initiatives.
What factors should be considered before offering life insurance?
When deciding to offer life insurance as an employee benefit, there are a number of factors to consider:
- What type of coverage will you offer?
- Will you offer term insurance, permanent, universal or a combination?
- Who will be covered (employee only, retirees, spouses, dependents)?
- What amount of the premiums will the employer cover?
- When is coverage effective?
- Will there be a waiting period to enroll?
- What amount of insurance will be available?
- How will the amount of insurance available be determined (flat fee vs. multiple of salary)?
- Will there be a minimum amount the employee is required to elect?
- What is the maximum coverage amount allowed?
What are the next steps?
Once you have an idea about the type of coverage you’d like to offer to your employees, Shepherd Insurance is here to help you find a plan that meets your needs. Contact us today to start building a benefit plan that will help you retain your current employees and attract new employees.