Group life insurance is a valuable inclusion in an employee benefits package.
Having a competitive benefits package is key to attracting top employees. While some benefits, like health insurance and paid time off, provide immediate aid to your employees, others provide more peace of mind for the future.
Group life insurance is one of those benefits. Offering your employees life insurance that can help provide for their families if something catastrophic were to happen to them can be a valuable part of a benefits package.
What is group life insurance?
Research shows that 60% of employees offered group life insurance join their company's plan. Most employers offer group life policies as part of larger benefits packages, such as Section 125 plans.
How does group life insurance work?
Most employer-sponsored group life insurance policies are term life insurance policies. This means that coverage expires after a preset number of years (whereas whole term life insurance, as its name suggests, never expires). For the lifetime of the policy, you cover some or all of the monthly or annual premiums for participating employees.
Most group life insurance plans focus primarily on death benefits, which are paid to a plan participant's beneficiaries if the employee dies. Often, group term life policies primarily cover natural deaths, though some plans include supplemental benefits such as accidental death benefits, which are added to the natural death payout amount. Accidental death benefits may require additional premium payments.
If you offer group life insurance to your employees, you should inform your team about voluntary permanent life insurance, which is an individual life insurance policy that your employees can acquire on their own. That's because employee coverage group plans are tied to your company; if employees leave your business, their plans usually do not go with them (though exceptions exist for some life insurance carriers). Even though you can't provide voluntary permanent life insurance to your team since it's an individual policy, your employees may appreciate you educating them on its availability.
Is there anything that life insurance doesn't cover?
In general, standard death benefits are wide ranging, though there may be select circumstances where they don't apply. These circumstances may include:
- Participant suicide during the policy's first two years
- A beneficiary murdering the covered participant
- Life insurance fraud committed on the policy application
- Death due to risky hobbies, though this is a less-common reason for insurers not to pay
Standard death benefits do cover accidental benefits. The reason your employees may opt for accidental death benefits is not for accidental death coverage but simply to provide their beneficiaries with more money in the case of an unexpected death.
What are the pros and cons of offering group life insurance?
Among the reasons you may want to offer group life insurance plans to your employees are:
- They're so affordable it's hard to justify not pursuing them. You and your insured employees often pay very little for group coverage that their benefits – keeping their families financially secure after their deaths – outweigh the costs.
- They guarantee coverage. When you offer group insurance to your team, your employees are guaranteed coverage. Individual policies that your employees could pursue on their own outside your company may have stricter requirements for securing coverage.
- They may improve employee retention. Offering good employee benefits often boosts employee retention, and the low cost of group life insurance makes this benefit one that may keep your team around for longer.
Among the reasons you might find yourself thinking twice about group plans are:
- They offer solely basic coverage. With basic coverage, beneficiaries receive, at most, twice the insured's annual salary. Experts advise those interested in life insurance coverage to sign up for policies with payouts of five to 12 times the insured's salary. While basic coverage doesn't reach this threshold, your employees can supplement your company's policy with individual plans of their own. In addition, some employer plans offer employees the ability to purchase additional coverage for higher monthly premiums.
- They don't travel with your employees. Although offering group life insurance plans may boost employee retention, there are employees who will leave. And when they do, they don't take your company's life insurance policy with them – well, not in the form you offer it. In some cases, employees can convert your group policy to an individual policy, but that means higher premiums (though this transition does circumvent the normally stricter requirements of obtaining individual plans).
- Policy options may be narrower than individual plans. Group term life insurance policies are often fewer in type and scope than individual plans. Employees may thus avoid participating in your group term life insurance plan and instead pursue an alternative to group term life insurance.
- Potential tax ramifications. Although group term life insurance policies are generally low cost enough to not meet the IRS's monetary definition of a taxable fringe benefit, purchasing higher-cost plans could mean paying more taxes. If plan coverage exceeds $50,000, then you must pay fringe benefit taxes on your policy.
What to consider when choosing a group life insurance policy
If you ultimately choose to provide group life insurance for your employees, consider the following as you decide on a plan:
- Life insurance carrier reputation. Choose a life insurance provider that has a strong reputation and years of practice behind it. When a company has a history of providing business owners like yourself with group life insurance, the odds are higher that should your employees ever have to file a claim, the insurer will likely pay it.
- Life insurance carrier customer base. If during your research you find that a life insurance company works mostly with large corporations, it may not be a good fit for your small business. You should instead search for a company that mostly provides insurance to companies of your size.
- Plan term. As mentioned earlier, group term life insurance isn't permanent. That's why, as you pursue group term life insurance plans, you should start an ongoing conversation with your team about the term lengths they'd like to see. Most carriers offer plans that last 10, 20 or 30 years while not being as complicated as group whole life or group universal life policies based on the cash value.
- Coverage inclusions. Determine whether the plans you're considering include supplemental accidental death benefits and other optional add-ons such as premium benefits waivers or dependent coverage. Through premium benefits waivers, employees may be able to skip premium payments during periods when they are sick or disabled. Through dependent coverage, the benefit scheme of life insurance is reserved – if the insured takes out coverage on one of their dependents and that dependent dies, they receive benefits.
- Coverage exceptions. Check the fine print of any plans you consider for the conditions under which coverage becomes ineffective. It's rare to see exceptions beyond those named above, but it's best practice to double-check and be sure.
- Coverage requirements. Although your employees are guaranteed coverage under most plan offerings, some plans may have additional requirements that employees must meet before they qualify for coverage. These may include a minimum number of hours worked every week or completion of a probationary period, which is a minimum length of time for which an employee must work for you before your plan covers the employee.
- Termination. Since your employees cannot take group life insurance coverage with them if they cease employment with your company, you should look at what they can do with your policy if they stop working for you. In some cases, employees can convert their group life plans to individual plans, but not all insurers offer this option. Some employees may not want to join your group plan if they can't switch to individual coverage after they leave your company.
How can businesses get group life insurance?
After doing your research to determine the life insurance carrier best for you, contact a licensed insurance agent who helps small businesses obtain group term life insurance. These agents usually work for the company from which you're hoping to buy your plan. Your agent should be able to answer all of your questions about plan premiums, coverage, death benefits, supplemental benefits, adding employees to the plan and navigating coverage exceptions.
Once you're in contact with a licensed agent, you'll need to gather your employees' health and beneficiary information. Your life insurance provider will likely also need your employees' basic identifying information such as their address, date of birth and Social Security Number. With all this information in hand, you can complete your application for group life insurance, and before long, you'll hear back on whether you are approved.