Life insurance is one of the most common employer-provided benefits, but it can also be one of the most misunderstood among employees. This article covers the basics, from types of coverage to how it effectively promote it to your employees.
The Basics: Types of Life Insurance
Life insurance is divided into two categories: term and permanent.
Permanent life insurance is life-long coverage that usually includes a cash value savings component. There are many types of permanent life insurance, described below. This type of coverage has higher premiums, but offers more long-term value.
The Basics: Employer-Sponsored Coverage
Employer-sponsored life insurance coverage can be offered in a variety of ways. Employers can offer a term policy, permanent coverage or both. Cost-sharing also varies, as some employers cover the full cost, some require employees to pay the full premium, and others 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) and often has a maximum amount cap. Group-term policies often end when an employee leaves the organization (or dies), but employees may be able to convert it to a permanent policy or renew it upon leaving. This is generally an affordable plan for employers to offer, though it does not offer as much long-term value to employees as a permanent plan.
Many employers who offer such a group-term policy also offer additional voluntary life 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:
The Basics: Taxes
Premiums for 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 employees’ gross income (up to $50,000 of coverage). The plan must meet special nondiscrimination rules, however, or key employees may not be eligible to exclude the cost of their coverage from their gross income.
The Basics: Communicating Value to 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.
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, 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 benefit 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:
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.
The Basics: Factors to Consider When Choosing Life Insurance Policies
When deciding to offer life insurance as an employee benefit, there are a number of factors to consider:
Once you have an idea about the type of coverage you’d like to offer, Austin Benefits Group can help you find a plan that meets your needs, contact us today. Austin Benefits Group offers more than benefits consulting, check out the full range of services from the best team in benefits.