If you are considering offering life insurance as an employee benefit or considering taking out life insurance on your employees, read on for a comprehensive guide.
Life Insurance As An Employee Benefit
More and more, businesses small and large are offering life insurance to their employees. Life insurance pays a lump sum to an employee’s designated beneficiary in the event of the employee’s death.
Types Of Life Insurance
What Type of Life Insurance Can I Offer My Employees?
Typically employers offer a small amount of Term Life Insurance for free. Basic group term life policies might be for $25,000 or $50,000, or the amount of the employee’s annual salary multiplied by one, two, or three years.
Term life Insurance policies have lower premiums than whole life and they are offered for a certain time period, such as 10, 20, or 30 years, and have no cash value. Term Life Insurance pays out only if the insured dies during the term.
Some employers offer supplemental group term life insurance, and the employee can enrol in it if they wish to pay the additional premium.
Generally, life insurance policies will set forth exclusions such as suicide, civil riots, death during military service – an employee should read the fine print!
Some add-on life insurance options that might be of interest to you, depending upon the nature of your business, are Group Accidental Death and Dismemberment (“AD&D”) and business travel accident insurance.
Pros and Cons Of Life Insurance For Employees
Starting with the advantages, for employers, free or low-cost group life insurance can make an employee benefits package more attractive to potential hires, especially those with families. It is easy to set up and maintain, as payments can be made electronically and automatically each month from your operating account.
For employees, enrolling in group life insurance through work is convenient for them, the premiums are often less than those for the coverage the employee could obtain on his or her own, and employees with serious medical conditions might qualify for a better rate than they would on their own.
Another advantage to employees is that the first $50,000 in coverage is tax-free as a de minimus fringe benefit.
For employers, the disadvantage is obviously cost. Life Insurance premiums are deductible as a business-related expense as long as the business is not a direct or indirect beneficiary of the policy, but it still requires cash out-of-pocket. Costs will vary according to the age and health of your employees.
A disadvantage for employees is that these days. they rarely stay with the same employer their whole career. Some policies allow an employee to convert their group policy to individual life insurance if they leave your employ, but the premium is likely to go up significantly.
Employee Leaves Business
What Happens When an Employee Leaves My Employ?
Employers typically offer life insurance through the business’ group life plan. If an employee leaves the employ of the business he or she can no longer be part of the group plan. Again, many policies can be converted to an individual life insurance policy, but the premium payment will increase.
Human Resources Assistance
How HR Can Help Employees Avoid Having Beneficiary Claims Denied?
Employers often automatically enrol new hires in their basic group term life plan, and during an open enrollment period can offer supplemental group life insurance to employees.
Human Resources should counsel the employee that all forms, especially the risk assessment questionnaire, must be completed in full and honestly, lest they risk having a beneficiary’s life insurance claim denied.
Corporate-Owned Life Insurance Policies
Company-owned life insurance policies (COLI) are options that allow for a business to minimize its tax burden and increase its after-tax income while financing employee benefits and covering the expense of replacing an employee upon his or her death. It is most commonly used to insure a business’ senior executives or other key employees.
The business must get the employee’s written consent to be insured. The death benefit is paid to the business, to other designated beneficiaries such as the family of the employee, or to a combination thereof.
The IRS regulates the tax treatment of COLIs, and under Section 101(j)(4) of the Internal Revenue Code, the COLI premiums are excluded from the business’ income provided all of the following Notice and Consent Requirements and one of the specified exemptions are met:
[The employee] is notified in writing that the applicable policyholder intends to insure the employee’s life and the maximum fact amount for which the employee could be insured at the time the contract was issued.
[The employee] provides written consent to be insured under the contract and that such coverage may continue after the insured terminates employment, and [the employee] is informed in writing that an applicable policyholder will be a beneficiary of any proceeds payable upon the death of the employee.
The insured was an employee at any time during the we-month period before the insured’s death
Directors and Highly Compensated Employees: at time of contract issue, the insured employee was a director, or a 5% or greater owner of the business at any time during the preceding year, or received compensation in excess of $95,000, adjusted for future inflation, in the preceding year, or was one of the five highest-paid officers, or was among the highest-paid 35% of all employees.
Thanks, Veronica Baxter, a writer, blogger and legal assistant operating out of the greater Philadelphia area.