Employer-sponsored life insurance is the way most Americans receive coverage. There are important decisions to make when offering coverage to employees.
More Americans now have life insurance coverage through their employer rather than with individual policies. According to the Life Insurance Marketing and Research Association (LIMRA), 108 million adults and children receive employment-based life insurance compared to 102 million individual policy holders.
One reason for the popularity of employer-sponsored life insurance is that few Americans are financially prepared to handle their final costs. LIMRA reports that more than 40 percent of employees have no life insurance and another 30 percent do not have enough to pay for burial and probate costs. For a low monthly premium — usually paid for by the employer — employers can give their employees peace of mind.
If you decide to offer life insurance benefits to your employees, you must determine:
- Which employees should be covered
- What type of life insurance benefits you want to offer
- How much coverage your employees need
- Which vendor is right for your company’s needs
You can offer life insurance to all of your full-time employees or only to some employees.
The advantage of offering coverage to a large number of employees is that you can get lower rates and avoid individual medical exams when you have a big group. Premiums are based on the ages of your employees, regardless of whether they are healthy. Your healthy employees help subsidize those who are categorized as uninsurable.
You also can decide to offer life insurance as a special benefit only to key employees. A downside is that you won’t be allowed to deduct the premiums for federal tax purposes unless you meet the government’s nondiscrimination requirements. To meet those requirements you must offer life insurance to at least 70 percent of your employees and at least 85 percent of participating employees cannot be key employees. If you decide to offer coverage to employees based on their marital status or employment-related factors, such as job duties, compensation, or length of service, keep in mind that you can’t offer coverage only to male employees or only to married employees with children.
The most popular employer-sponsored policy is group term-life insurance. Most group term policies only are effective for as long as an employee works at the company. Coverage is for employees only, not for spouses or children. To offer term-life insurance, you must have at least 10 full-time employees, although there is an exception. The 10-employee rule is not required if you provide coverage to all full-time employees; base coverage on employees’ annual salary; and do not require physical exams to obtain coverage. The downside of this type of coverage is an employee will lose their coverage if they leave the job. However, some insurers allow employees to convert their group term coverage to an individual permanent policy. The individual policy might require additional underwriting and the features and premiums might not be exactly what the employee wants or needs.
Permanent life is becoming a popular option because it can easily be converted to an individual policy if an employee leaves their employment. Another advantage is it earns interest or dividends. Unlike a term life policy, employees — not employers — usually pay the premiums.
The most popular benefit amounts are either a set amount or an amount based on the employee’s salary.
Employers often gravitate to a set amount of $50,000 because they can deduct the cost of premiums from their annual income taxes. Also, the premium cost for the first $50,000 of group term life insurance isn’t included in the employee’s gross income.
If you choose instead to offer a benefit based on an employee’s salary, you might base it on one, two or three times the employee’s annual salary.
Keep in mind that if you offer a benefit of more than $50,000, IRS code Section 79 requires you and your employees to pay Social Security and Medicare taxes on the additional amount.
Reach out to your USI consultant to help you find the best life insurance plans from which to compare and choose.