Decoding Life Insurance as an Employee Benefit

Life insurance as an employee benefit should be part of your core benefits package. Here’s why.

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Decoding Life Insurance as an Employee Benefit

Here's what you need to know:

  • Designing a comprehensive but budget-friendly benefits package is 1 way Human Resources teams and small businesses can boost employee satisfaction and reduce turnover
  • Employers typically invest in group term life insurance
  • There are tax benefits (with stipulations) for employers who provide life insurance benefits
  • Employee benefits that tie in well with life insurance include employee assistance program benefits and financial planning benefits

As the Great Resignation continues with no end in sight, acquiring and retaining top talent is keeping HR professionals busy. Combined with the onset of a potential recession, the pressure is bound to intensify.

Designing a comprehensive but budget-friendly benefits package is 1 way Human Resources teams and small businesses can boost employee satisfaction and reduce turnover.

But what benefits should you include?

Generally, health insurance, PTO days, and remote work tend to be the top core offerings. But there’s another bread and butter benefit that should be on your radar: life insurance.

How does employer-sponsored life insurance work?

Purchasing life insurance for your workers is fairly straightforward. Usually, an employer will invest in group term life insurance, paying premiums for employees up to a certain amount.

The process for investing in life insurance is:

  1. Deciding how much you want to pay for the insurance per employee. The usual amount is twice the amount of an employee’s annual salary.
  2. Choose an insurance provider.
  3. Enroll employees into the program and file a copy of the enrollment form.
  4. Have employees designate a beneficiary. Under basic group insurance, they will not need to take a medical exam.
  5. Ask your employees annually to update their beneficiary information, if required.

In the case that a covered employee passes away, you will need to inform the insurance company. Along with any documentation they require, you will need to send a copy of the employee’s death certificate.

If an employee is terminated, the insurance company may allow them to convert their group policy into an individual life insurance policy. However, this is at the insurance company’s discretion, and the employee is unlikely to receive the same terms and coverage under the group plan.

Furthermore, while group plans don’t make medical exams mandatory, if an employee chooses additional coverage options, they may be required to submit 1.

Are there different types of group life insurance?

Employers typically invest in group term life insurance. Like personal term life insurance, the policy covers specific individuals for a fixed amount of time.

An alternative is universal life insurance. A group universal life insurance plan is usually more expensive than term insurance, but it provides the possibility to build cash assets in addition to the death benefit.

Similarly, group variable life insurance includes investing options to the cash value and death benefit.

Why you should offer life insurance coverage

The short answer: Life insurance coverage offers peace of mind for your eligible employee and their family, and it’s a staple benefit. So, yes, it’s generally a sound benefits option.

The long answer is a bit more complicated.

For example, consider the most in-demand benefits:

In 2022, 88% of employees wanted health insurance benefits, 82% wanted retirement-related benefits, and 52% liked the idea of financial but non-retirement benefits.

A sound life insurance policy continues to be a desired employee benefit.

Life insurance isn’t considered health insurance because it’s related to death. Nor is it closely linked with retirement. Most HR professionals know that life insurance is linked to general financial benefits, but life insurance coverage has been a mainstay benefit since it was first introduced in 1911.

While life insurance may be categorically awkward and its dense, legal language off-putting for most employees, a sound life insurance policy continues to be a desired employee benefit. And unlike other short-term or workplace benefits, such as wellness programs or flexible scheduling, life insurance indicates that employers value their workers.

But there are many direct benefits, too. A life insurance policy:

  • Is usually affordable through group life insurance.
  • Helps to acquire and retain talent with family and children.
  • Improves individual peace of mind and, thus, productivity.
  • May provide tax deductions for the employer.

Tax benefits providing life insurance benefits

There’s 1 more significant benefit for the employer regarding life insurance policies: preferable tax treatment. If your insurance program is structured properly, the first $50,000 spent on group life insurance isn’t included in the employer’s gross income.

According to the IRS, the employer is eligible for the tax benefit if they pay the cost of the life insurance directly or they arrange for the premiums paid by another employee to subsidize those paid by others

In addition, the life insurance plan should be non-discriminatory and provide a death benefit. Non-discriminatory plans do not restrict eligibility based on whether an employee is in a key role or in certain roles.

What’s your biggest 2022 HR challenge that you’d like to resolve

Answer to see the results

Who is covered under employer-sponsored life insurance?

Generally, you’ll want to roll out a non-discriminatory program. This ensures you can take advantage of the potential tax deductions but also motivates all workers — not just a fraction. To meet these requirements, at least 70% of employees should be covered, and 85% of plan participants should not be in key roles.

Some employees can be excluded from eligibility:

  • Employees who have worked for the organization for less than 3 years
  • Part-time and seasonal employees
  • Employees with coverage under a collective bargaining agreement

If you choose to offer basic life insurance only to high-performing or a specific set of employees, you can’t claim the tax deduction.

Customizing your life insurance policy

Group life insurance is the most popular form of employer-sponsored life insurance. But this isn’t the only option. You may offer supplemental life insurance to stand apart from the competition or provide extra assistance for your employees.

In addition to basic life insurance coverage, you may decide to add extra coverage, called riders. Some examples include:

  • Supplemental life insurance — Insurance needs change constantly, and employees may need more than basic coverage as they age. Supplemental life insurance gives them the option to purchase additional protection.
  • Dependent life insurance — This policy covers not just the employee but their dependents, including their spouse or partner, elderly parents, and eligible children. Children are generally covered until the age of 26 unless they have a serious physical or mental disability.
  • Business travel insurance — If a specific role requires the employee to travel frequently, investing in business travel insurance can reduce stress and boost talent acquisition.
  • Accidental Death and Dismemberment (AD&D) insurance — The name is fairly self-explanatory, but AD&D insurance provides the beneficiary with a payment amount if the insured loses a limb or dies accidentally. While this type of insurance is limited to certain events, it extends to events outside the workplace.

Employee benefits that tie in well with life insurance

Life insurance is an essential benefit, but it works well alongside adjacent benefits. Two benefits that can help your HR team explain life insurance policies and assist employees in their personal life are financial planning and employee assistance program (EAP) benefits.

Here’s why.

Financial planning benefits can help employees understand how their life insurance premium fits into their long-term financial strategy. For example, because a worker uses their employer-based life insurance, they may be able to invest in other insurance or financial products.

An employee assistance program, meanwhile, provides several employee services, such as counseling for personal problems. An EAP can help employees improve their quality of life and reduce stress.

Create a compelling benefits package to attract talent

Life insurance may be a staple benefit, but as the competition for talent rages on, crafting a compelling and comprehensive benefits package is more important than ever. To find out what employees really want, check our Benefits Benchmark Report.

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