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Group Life Insurance for Small Businesses

Group Life Insurance for Small Businesses

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As part of a comprehensive benefits package, Group Life Insurance can serve as an important financial safety net for your employees and their families. Commonly offered by businesses of all sizes, Group Life Insurance serves to provide financial benefits for employee families in the unfortunate event of an employee death.

What is Group Life Insurance?

Group Life Insurance is an employer-sponsored benefit that businesses can offer to their employees. By offering this benefit, an insurance company will make a payment to your employees’ family members or other beneficiaries in the event of the death of an employee.

This benefit can be offered as part of a comprehensive employee benefits package that may also include group health insurance, group disability insurance, and retirement plans. Your employee benefits package as a whole can contribute to employee happiness and well-being, and improve your company’s recruiting and retention of valued employees.

How does Group Life Insurance work?

Group Life Insurance policies are sponsored by your company for the benefit of your employees. With Group Life Insurance, you pay the insurance company a premium for employees whom you wish to cover. Employees participating in the Group Life Insurance policy choose one or more beneficiaries. If the employee dies while covered under the Group Life Insurance policy, the insurance company will make a payment to the beneficiaries.

Group Size

Most Group Life Insurance policies require at least 2 people to form a group. If your group has less than 10 employees, you’ll need to provide the insurance to all your full-time employees in order to form a valid group for tax purposes.

Term Insurance

Group Life Insurance is usually term life insurance that is renewed annually by your company. Employees who are added to the plan have life insurance coverage while they are employed by your company.

Guaranteed Issue

Group Life Insurance policies are guaranteed issue, which means that your employees do not need to take a medical exam or submit medical information in order to qualify for coverage. This is different from life insurance purchased in the individual market, which usually requires a medical exam in order for an insurance policy to be issued.

Group Life Insurance can be guaranteed issue because they are issued for relatively small amounts of coverage per employee. Also, having a group spreads the risk of loss among multiple people, so any payouts caused by an employee death are less impactful to the insurance company.

Why should my business offer Group Life Insurance?

Group Life Insurance is an extremely common and popular employee benefit that can provide some financial peace of mind for the families or beneficiaries of your employees. According to the Bureau of Labor Statistics (BLS), in 2020, 60% of all workers had access to employer-provided Group Life Insurance, and 98% of those workers participated in their employer-sponsored Group Life Insurance plan.

Offering Group Life Insurance can enhance your employee benefits plan and keep your benefits package competitive with other employers. It also contributes to the emotional and financial well-being of your workforce.

Who pays for Group Life Insurance policies?

It is very common for companies to pay for their employees’ basic life insurance coverage. According to the BLS, in 2020, 95% of workers with Group Life Insurance coverage did not have to make a contribution to their Group Life Insurance premiums.

How much coverage to offer

Businesses can choose the amount of life insurance coverage per employee. Two of the most popular coverage options are a flat rate per employee or a multiple of an employee’s salary. According to the BLS, in 2019, 56% of workers were covered under the multiple of salary method, while 38% of workers were covered under the flat dollar amount method.

It is common for employers to offer different benefit options to different classes of employees. For example, a manufacturing company might offer a flat-dollar benefit to hourly factory employees, while offering a multiple of salary to marketing and sales employees.

Flat-Dollar Benefit

For example, you may choose a flat benefit of $10,000 or $25,000 per employee. This approach is common for workers who are part-time or who have fluctuating or low wages. According to the BLS, the median benefit in 2019 for workers using the flat-dollar benefit was $20,000.

Multiple of Salary Benefit

For companies with salaried employees, it is common for companies to offer a multiple of salary as the life insurance benefit. This multiple is commonly one or two times an employee’s annual salary. For example, if an employee earns $75,000 per year, and your company offers a two-times life insurance benefit, the employee’s beneficiary would receive $150,000 if the employee died and was covered by the plan.

According to the BLS, in 2019, for workers covered under a multiple of salary, 64% of workers had coverage of one-times salary, 11% had coverage between one- and two-times salary, while 25% had coverage of two-times salary or greater.

Supplemental Coverage

In addition to the basic coverage that employers offer, you also can give your employees the option to purchase additional insurance coverage. This supplemental coverage commonly increases the employee’s coverage up to three- or four-times salary. The additional premium for the higher coverage is usually paid for by the employee who elects to purchase the supplemental insurance through paycheck deductions.

Employees may find the ability to purchase supplemental coverage through your company’s group attractive because it is possible your group’s rate may be lower than the cost for them to purchase insurance on the individual market. Their individual pricing is highly dependent upon their individual age and health condition, while the pricing for your group is calculated based on the entire group.

To purchase supplemental coverage, your employee may be required to complete a form called an evidence of insurability. In this form, the employee provides information to the insurance company about their health condition. Employees need to have a certain level of health in order to be eligible for the increased coverage. Although it is not common, in some cases, the insurance company may request your employee to take a medical exam or blood test in order to qualify for the supplemental coverage.

What happens to Group Life Insurance coverage if an employee leaves?

If an employee leaves the company, he or she will no longer be covered under your company’s Group Life Insurance plan. However, you can set up your Group Life Insurance plan so that employees can continue their coverage after leaving your company by paying premiums themselves.

Depending on the former employee’s age and health condition, it could make sense for them to continue their life insurance coverage through the group. However, if the former employee is young and in good health, it could be cheaper for them to purchase life insurance on the individual market rather than remaining on the Group Life Insurance plan.

How much does Group Life Insurance cost?

The price of your company’s Group Life Insurance policy will be determined based on the size of your company, the age and gender of your employees, and your company’s industry. Companies operating in more hazardous industries will have higher premiums, so a construction firm, for example, will pay more than an accounting firm. For larger companies, the insurance company will adjust your premiums on an annual basis based upon the actual loss history, but this generally does not apply to smaller companies.

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What are the tax implications of Group Life Insurance?

Tax Treatment for the Employer

Premiums that your business pays for Group Life Insurance for your employees are deductible as an ordinary and necessary business expense on your company’s taxes if the company or its owners do not directly or indirectly benefit from the policy. This covers most policies that cover employees where the employees are able to choose their own beneficiaries. However, if your business is an indirect or direct beneficiary of the insurance policy, then it may not be tax-deductible for your business.

Tax Treatment for Employees

Life insurance premiums that are paid by an employer are considered a taxable fringe benefit for employees. However, the first $50,000 of life insurance coverage provided by an employer is exempt from tax. The premiums for any coverage that the employer pays that exceed $50,000 are considered taxable income for the employee.

For example, your company provides two-times salary Group Life Insurance to your employees. Employee John Smith earns $60,000 per year, so his insurance coverage is $120,000. Since John Smith’s coverage exceeds the $50,000 exception by $70,000, the cost of the additional $70,000 of coverage will be included on his W-2 income.

However, the cost of the additional coverage is not based on the actual premiums that your company pays. Instead, it is based upon premium rates provided by the IRS per $1,000 of coverage calculated using the employee’s age. In 2021, the following table, which can also be found in the IRS Employer’s Tax Guide to Fringe Benefits:

Cost Per $1,000 of Protection for 1 Month

Under 25$0.05
25 through 29$0.06
30 through 34$0.08
35 through 39$0.09
40 through 44$0.10
45 through 49$0.15
50 through 54$0.23
55 through 59$0.43
60 through 64$0.66
65 through 69$1.27
70 and older$2.06

In John Smith’s case, if he were 37 years old, the calculated cost of his additional $70,000 of coverage would be $70,000 divided by $1,000 times $0.09, or $6.30 of additional income added to his W-2 per month.

If employees do not wish to be taxed on the additional coverage, they have the option to decline coverage that exceeds $50,000.

Accidental Death & Dismemberment (AD&D) Coverage

Many life insurance policies also have an accidental death & dismemberment benefit that is either included in the policy or can be added to the policy for a fee. AD&D insurance pays a benefit if a covered employee is killed in an accident. It also pays a partial benefit in the case of specific types of injuries, such as the loss of limbs, speech, or sight.

Accidents covered by AD&D insurance include deaths from car crashes, murder, heavy equipment accidents, and drowning. However, AD&D does not pay for deaths or accidents caused by illness or disease, drug overdoses, suicide, or natural causes.

Similar to Group Life Insurance, the benefit for AD&D insurance can be either a fixed dollar amount or a multiple of an employee’s salary.

AD&D insurance is paid in addition to the benefit paid by the Group Life Insurance policy. For example, consider an employee that has $50,000 of Group Life Insurance and $50,000 of AD&D insurance. If the employee accidentally drowned, his beneficiaries would receive $100,000 from the insurance company. However, if the employee dies from a heart attack, the beneficiaries would only receive the $50,000 of life insurance coverage, as AD&D insurance does not cover heart attacks.

For dismemberment, an insured employee would receive a partial payment. Although each policy is different, a typical policy might offer the following payouts:

Total paralysis of arms and legs100%
Loss of any combination of two: hands, feet or eyesight100%
Loss of speech and hearing in both ears100%
Loss of arm/leg permanently severed at or above elbow/knee75%
Total paralysis of both legs50%
Total paralysis of arm and leg on one side of the body50%
Loss of one hand, foot or sight in one eye50%
Loss of speech or hearing in both ears50%
Loss of thumb and index finger on the same hand25%

Thus, if an employee with $50,000 of AD&D coverage experienced the total paralysis of both legs, that employee would receive a payment of $25,000 from the insurance company.

Dependent Life Insurance

Your Group Life Insurance can also cover an employee’s dependents, which may include an employee’s spouse, domestic partner, and/or children. In order to cover an employee’s dependents, an employee must also be covered by the Group Life Insurance plan. Usually, dependent coverage is offered as an option to the employee, and the employee will pay for the coverage through payroll deductions.

It is common for the dependent’s coverage to be capped at some percentage of the employee’s coverage, such as being limited to 50% of the employee’s amount of coverage. Offering this coverage to your employees gives them a hassle-free way to purchase a small amount of life insurance coverage for their dependents. The group rate that is offered by your plan may be also more favorable than the rate that they would be able to obtain in the individual insurance market.

Final Word

Group Life Insurance is an important and fairly common benefit that employers provide for their employees. Group Life Insurance can provide peace of mind to your employees, knowing that if something were to happen to them, their families or beneficiaries would be financially covered. While a majority of employers in the U.S. provide Group Life Insurance for their employees, it is important for every business owner to understand the concepts behind this coverage and weigh the pros and cons of providing this benefit.

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