According to LIMRA's 2020 Insurance Barometer Study, 54% of Americans had life insurance. Life insurance is a binding agreement that provides the policyholder with a death payout if the insured passes away. The policyholder must either pay the entire payment at once or recurring premiums over time for the life insurance policy to stay in effect.
A study by MetLife on Employee Benefit Trends shows that employees value this type of benefit, as shown below:
What is Employee Life Insurance?
Employer-provided life insurance is a benefit in which the employer purchases the policy and covers the premiums on behalf of the employee. Typically, the corporation offers this benefit to only a limited group of employees to draw them in and keep them on board for an extended period. Employee life insurance is a benefits package that will provide money to an employee's designated beneficiaries when the employee dies.
Who is Eligible?
Employer-provided life insurance is available to any corporation, sole proprietorship, or legally recognized business with at least five employees. This coverage may be provided to employees paid by companies that meet the eligibility requirements. The minimum and maximum ages for employees under this policy are 18 and 60, respectively.
If you want to offer life insurance to selected employees, you will not qualify to deduct the premiums for federal tax unless you satisfy specific non-discrimination standards. Non-discrimination standards are typically intended to deter you from offering advantages exclusive to those who are paid the highest salaries or preventing lower-paid employees from taking advantage of due to the cost of the benefits. The following conditions have to be met:
- The policy has to benefit at least 70% of all the employees
- 85% of the employees benefiting should not be key employees.
- The policy benefits employees who meet the requirements under a category considered by the IRS not to favour key employees.
You can, however, offer life insurance based on the following:
- Marital status
- Job duties
- Length of service
- Participation in a pension, profit-sharing, accident, or health plan
- Other employment-related factors.
Example: You cannot, for instance, withhold benefits from your female employees because you believe that your male employees are the primary breadwinners in their families.
Similar to this, you cannot exclude single people or married people without children from receiving life insurance benefits in favour of only those employees who are married and have children.
Types of Employee Life insurance you can offer
There are generally two life insurance plans: term life insurance and whole life insurance. These two can then be further divided into subgroups.
Term: It covers the worker for a predetermined period, usually the duration of employment. Term life insurance coverage is usually equal to an employee's annual income and is often provided by employers, who also pay the premiums. Due to the short duration of term insurance, premiums are less expensive.
Whole: This lasts for as long as the employee is alive. The employee normally pays the premiums for this type of plan, which is more expensive than term life insurance. Whole life insurance is an investment since it grows over time, and the policyholder can spend the money before they pass away. However, because of their relatively low rate of return, financial experts frequently view this insurance as a poor investment.
Differences between Whole Life and Term Life insurance
Below is a list of common life insurance plans that organizations can offer for their employees:
- Group life insurance (Term)
- Voluntary Life Insurance
- Decreasing Term Insurance
- Accidental Death and Dismemberment (AD&D) Insurance
- Group Carve-out
1. Group life insurance
A lot of organizations provide group term life insurance for their employees. Like other types of life insurance, group term life insurance pays a death benefit to the person you choose if you pass away while the policy is in force.
Companies offer this package at no cost to the employee, with the option to acquire more coverage through payroll deductions. Employees may have the opportunity to purchase coverage for their spouses and children.
How it works
According to the Society for Human Resource Management, about 80% of businesses have group life insurance paid for by the employer. Employees who match the qualifying conditions, such as being a permanent employee or being hired within 30 days, may be issued group life insurance plans, which are often written as term insurance. Group term life insurance coverage can be changed for qualifying life events or during an open enrolment period.
The typical level of coverage is often equal to the annual pay of the insured employee. Most of the time, employers cover all basic insurance costs. Additional amounts are typically offered in multiples of the employee's annual income for an additional premium the employee must pay.
As evidence of coverage, insured members obtain certificates of insurance. The insured parties select their beneficiaries, just like with individual life insurance.
TIP: You might not be able to "take it with you" when you shift jobs if your employer provides group term life insurance. Group term life insurance offered by an employer is typically not a transferrable benefit.
Advantages and Disadvantages
Group term insurance is typically affordable for younger individuals, and because all eligible employees are immediately covered, participants may not be subject to underwriting. However, most group plans feature rate bands where the insurance cost automatically increases in increments, for instance, at ages 30, 35, 40, etc., as opposed to individual term insurance plans, which normally lock in a rate for 20 to 30 years. The plan document specifies the premiums for each rate band.
Despite being affordable, group life insurance often does not provide enough coverage and should be supplemented with an individual plan. The amount of available coverage varies by group, but employers or association groups providing the insurance frequently limit the coverage available to employees or members based on factors like tenure, base salary, the number of dependents, and employment statuses like full-time, associate, or executive.
Group insurance should also be viewed as supplemental because it depends on employment. When a person's employment ends, their insurance coverage automatically expires, and getting individual insurance may be more difficult or expensive. The option to convert a group term policy into an individual permanent policy is provided by several insurers. The conversion possibilities can vary, they might not be automated, and underwriting can be necessary. As a result, a person might be evaluated and given a policy with a substantially higher premium. Additionally, the conversion policies may not always be the most competitive items and may be restricted.
2. Voluntary Life Insurance
Voluntary life insurance is an additional but optional coverage offered by employers. It is usually a supplemental plan for the base group insurance plan. A cash benefit is given to a beneficiary following the death of the insured under voluntary life insurance, which serves as a financial protection strategy. The insurer guarantees payment upon the insured's demise in return for a monthly premium paid by the employee. This plan can either be in the form of voluntary term life insurance or voluntary permanent life insurance.
- No medical examination is necessary with voluntary life insurance.
- Premiums for voluntary life insurance plans are typically less expensive thanks to employer sponsorship than those for plans purchased on an individual basis.
- Voluntary term life insurance benefits will end upon termination of employment.
3. Decreasing Term Insurance
A type of renewable term life insurance called decreasing term insurance has coverage that declines at a set rate throughout the policy's life. Typically, the contract's premiums remain the same, and coverage reductions occur every month or year. Depending on the insurance company's plan, terms can be between one and thirty years.
Decreasing term insurance is sometimes used to pay a temporary financial obligation, such as a student loan or mortgage. You can get a policy that reduces the death benefit as you pay down the debt if you want life insurance to cover this short-term financial burden. The leftover death benefit is given to your beneficiary in this scenario if you pass away before repaying the loan. Decreasing term life insurance could be less expensive than level term life insurance because of the declining death benefit.
As an illustration, say John wishes to pay off his mortgage so that his wife, Mercy, can keep the home if he passes away. They recently took a 30- year $500,000 mortgage for a property. Mercy is named as the beneficiary of the 30-year decreasing term life insurance policy that John purchases with a $500,000 death pay out. Mercy receives the full $500,000 if John passes away within the first year. Mercy will only get a death benefit of about $466,600 if he passes away in the third year of the insurance. Until the 30-year term is passed, the death benefit will continue to decline every year by around $16,600.
Remember that this is an example. The terms of your policy will determine the rates at which your death benefit depreciates.
According to the principle underlying diminishing term insurance, as people get older, certain liabilities and the associated requirement for high levels of insurance also decline. Mortgage life insurance is a popular form of in-force decreasing term insurance that attaches its benefit to the amount of the insured's outstanding mortgage.
It might be advantageous for small firms to ensure debt against start-up and ongoing expenditures. The insurance also enables the company to reasonably guarantee commercial loan amounts.
4. Accidental Death and Dismemberment (AD&D) Insurance
After heart disease, cancer, and COVID, accidents are the fourth most common cause of death in the US. According to the Centres for Disease Control, they are the leading cause of mortality among adults between the ages of 25 and 44. Therefore, it would seem logical to establish an insurance policy that would cover accidental deaths.
Accidental death and dismemberment (AD&D) insurance was created for this reason. Knowing what it covers and whether you need it is important, as with any life insurance policy.
Accidental death and dismemberment (AD&D) insurance covers the insured's unintentional death or dismemberment. It is typically included as a rider to a health insurance or life insurance policy. Loss of use of body parts or functions is included in dismemberment, for example, limbs, speech, eyesight, and hearing).
Prospective buyers should carefully examine the policy's terms due to coverage limits. As an illustration, AD&D insurance is constrained and typically does not cover unusual incidents. Additionally, it is not a suitable replacement for term life insurance and is only supplemental insurance.
In the event of an individual's accidental demise or dismemberment, which is the loss—or loss of use—of body parts or functions, AD&D insurance pays payments.
Always study the fine print because AD&D insurance typically has considerable coverage restrictions. If the covered person passed away from a disease like cancer or heart disease, AD&D will not compensate the family.
AD&D may provide benefits that are equivalent to or greater than the normal insurance's face value (typically two times). Accidental death often refers to rare occurrences like exposure to the environment, car accidents, homicide, falls, drowning, and mishaps involving large machinery.
- An unintentional death affects the surviving family members emotionally and financially as they must now adjust to the unexpected loss of income. The death benefit from an AD&D policy can enhance your sense of security by easing that load.
- Because the loss of income will continue, AD&D plans offer a death benefit in addition to the typical life insurance death payment on the insured. The death benefit amount is often the same as, or a multiple of, the death benefit amount of the regular policy. Double indemnity is the name given to this additional benefit since it is typically twice the original benefit.
- Premiums are reasonably priced since coverage is restricted to specific incidents that result in accidental death or limb loss. Participating employees can incur a monthly cost of a few dollars if their employer provides the benefit. Even when bought separately, the expenses are much lower than those for term insurance with the same face amount.
- Because it only pays out in particular circumstances, this limited coverage may be detrimental to policyholders. The AD&D policy does not pay out if a death occurs outside of these restrictions. Paid premiums are forfeited and remain the property of the insurer. For instance, no benefit is given if a person dies due to a terrorist assault because that is seen as an act committed during a time of war. As was done for victims of the 9/11 terrorist attacks in the United States, insurers have the authority to create exceptions to this rule.
- If the insured quits the group or employer where the coverage is offered, it could not be transferable. Frequently, the coverage expires when the insured's relationship with the sponsor ends, leaving them defenceless until new coverage is given. Additionally, having AD&D could deceive policyholders who plan to include the face value in their cumulative life insurance totals.
Since AD&D only pays in particular circumstances, it shouldn't be used to assess how well-balanced a customer's life insurance portfolio is. Traditional life insurance should be sufficient to give the recipients the support they need financially. If an accident results in death, AD&D supplements. It provides an additional benefit in case the insured departs suddenly and without warning.
Below is a list of instances not covered by AD&D?
- Accidents that happened before the plan was in place
- Death by illness, also including mental illness
- Self-inflicted injuries and suicide
- Overdose of drugs
- Accidents under the influence of alcohol
- Accidents and deaths while committing a crime
- Accidents and deaths while participating in a riot or war
- Accidents and deaths from car racing or playing sport.
5. Group Carve-Out Plan
Employers can reward key employees with a group carve-out plan, a sort of life insurance benefit, in addition to the group term life insurance coverage offered by the company. Those with a lengthy history with the organization, CEOs, team captains, or top salespeople may all be considered key personnel. People who are qualified for the carve-out plan have access to perpetual life insurance, which may accrue financial value over time.
In a carve-out plan, the premiums paid by the employer for the group term life insurance and, in some situations, the employee's insurance policy are tax-deductible in the year they are paid. Both the employer-paid portion of the individual policy premium and the group term life insurance premium are tax-deductible as employee benefits and remuneration, respectively.
The ability to keep essential staff, though, is perhaps the biggest advantage for an organization. There is always a chance that a company's top performers would depart for a position with higher money, better perks, or other allures. Offering a more lucrative insurance and retirement package is one method to recognize and reward top achievers and strive to keep them on board.
Group carve-out policies address the main drawbacks of group term life insurance. They might, however, also be subject to some limits of their own. Employers might be unable to deduct the premiums they pay for the permanent insurance, for instance, depending on how a plan is set up. Furthermore, there is no assurance that the carve-out strategy will achieve its goal of keeping valuable individuals, particularly if they end up being hired by a rival organization that has an even stronger carve-out plan.
Advantages to employees
- Employee life insurance is more affordable as compared to individual plans.
- Life insurance obtained through an employer is often guaranteed, meaning you can obtain a set amount of coverage without having to respond to several health-related questions or undergo a medical examination.
- Your premiums will easily be taken out of your salaries.
Disadvantages to employees
- Employer may not offer sufficient life insurance
While the cost of the basic life insurance offered by your employer is typically inexpensive or free, and you might be able to purchase additional coverage at a discount, your policy's face value might still not be sufficient. You should probably carry coverage of at least six times your annual payment if you have dependents who rely on your income. Even having insurance worth 10 to 12 times your pay is advised by some experts.
According to Brian Frederick, a certified financial planner (CFP) at Stillwater Financial Partners in Scottsdale, Arizona, " Most people can buy an additional four to six times their salary in supplemental coverage over and above what's provided by their employer, While this amount is sufficient for some people, it isn't enough for employees that have nonworking spouses, a sizable mortgage, large families, or special-needs dependents."
"Death benefits that replace salary do not take into account bonuses, commissions, second incomes, and the value of additional benefits such as medical insurance and retirement contributions," says Mitchell Barber, who is a financial service professional at the Centre for Wealth Preservation.
On the other hand, if you're single or have a partner who doesn't rely on your salary to meet home expenditures and the two of you don't have children, your employer's group life insurance may be adequate. Unless you wish to pay for your funeral costs or have debts, such as co-signed school loans, that you don't want to leave behind for someone else, you may not need life insurance at all if you're in that circumstance.
- You lose your coverage when your job situation changes
You never know when you might need life insurance, just like health insurance, so you don't want any gaps in your coverage. Your employer-provided life insurance may expire if you switch employment, are fired, or have your hours decreased.
A lack of portability may be a problem if you do not immediately go on to another employment offering with similar coverage. Some policies let you change your group coverage to an individual one, but the cost will probably go up significantly. Additionally, the premiums may be too expensive if you lose your coverage due to a layoff.
Thaddeus J. Dziuba III, a life insurance specialist at PRW Wealth Management says, "Since the products that are available for conversion from an employer-provided plan are typically limited to just one insurance carrier's offerings, a client can generally find a more cost-efficient insurance policy outside of the employer's plan."
Even if you stay at your job, there's a chance your employer can decide to cease providing life insurance as a benefit to save costs and leave you without coverage.
- Coverage gets tricky when your health declines
"If you rely solely or heavily upon group insurance, and then suffer a medical condition that forces you to leave your job, you may be losing your life insurance coverage just when your family is going to need it the most," says Jim Saulnier, a CFP with Jim Saulnier & Associates. At this point, you might not be financially capable to purchase an individual policy.
"You could end up handcuffed to your job to keep the life insurance if you experienced a serious-enough health issue,"- David Rae
- Plan may not provide enough coverage for spouses
While the benefits package from your work most likely includes health insurance for your spouse, it may not always have life insurance. If it does, the coverage can be small.
According to Saulnier, many employees fail to fully insure their spouses because they frequently believe that the family will only experience financial difficulties if the primary breadwinner passes away. However, the loss of a nonworking or low-earning spouse can have a significant impact on the family's financial situation. "I frequently ask a client rhetorically, 'Are you going back to work Monday morning if your [partner] dies on Saturday?' Do you have enough PTO (paid time off) to cover an extended leave," Saulnier adds.
Employee life insurance does not only benefit the employees. It helps an organization to have better staff retention since life insurance is a benefit that will increase employee satisfaction. Life insurance also boosts peace of mind and security for employees, which in turn increases a company's productivity.
Nicole Chimwamafuku is Finance, Strategy and Performance Management Consultant at Industrial Psychology Consultants (Pvt) Ltd, a business management and human resources consulting firm.
Phone: +263 242 481946-48/481950
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