Bud explains group term life insurance, including the differences between basic and voluntary and term and perm life insurance.
I followed your advice about ancillary plans, and now I’m thinking about adding a life insurance plan to my company’s benefits package. Can you explain the differences between Basic Life Insurance and Voluntary Life Insurance and term vs. perm? What’s a good amount of coverage to provide, and what kind of fees can I expect per month for this benefit?
Life Insurance Neutralizes Uninsured Surprises
Several columns ago, I was asked to prioritize ancillary insurance plans: which are the most important benefits and which lines of coverage are most appreciated by employees? Dental and Short Term Disability come up the most frequently, but a close third is Basic Life Insurance.
The “basic” in Basic Life Insurance refers to the fact that employers pay for the cost of the plan. This differs from Voluntary Life Insurance, where employees select and pay for an additional amount. Many times, an individual’s life insurance needs aren’t met by the minimum coverage provided by the employer—and the employee wants to add an additional amount to be paid for through payroll deductions. Voluntary Life Insurance allows an employee to select additional coverage amounts (generally in $10,000 or $25,000 increments) at similarly competitive rates and without the need for evidence of insurability.
Costs for policies vary, but are generally lower than people expect. As I’ve talked about before, insurance carriers do use the ages and genders of your employees to calculate rates. I can, however, give you a few examples of companies that recently adopted my recommendation to add a Basic Life plan of $50,000 life insurance + AD&D:
- 90-employee school group = $411 per month
- 67-employee tech company = $344 per month
- 48-employee manufacturing company = $167 per month
Given the relatively low costs, the data around life insurance is surprising. LIMRA (Life Insurance Marketing and Research Association) studies show that over 40% of employees have no life insurance, whatsoever. Another 30% don’t have enough to pay for the costs of interment plus probate. By providing low-cost Group Term Life insurance for employees, your company can insure that employees’ families have a boost of income to offset unplanned expenses during a tough time.
Section 79 of the IRS code allows an employer to purchase up to $50,000 of Group Term Life insurance for employees without the employee being taxed on the premium amount as income. (It’s considered “casual” insurance because of the low premiums for this type of coverage.) It’s a great way for employers to provide a benefit that’s greatly appreciated at the time of need, and it fills a gap for many employees who haven’t purchased life insurance on their own.
Most companies choose to provide $50,000—the maximum amount allowable under law that doesn’t cause employees to incur a tax consequence. (That amount has increased over the past 20 years or so, up from the then-popular $25,000 benefit.) Probably the second most popular amount is for employers to provide a 1x earnings benefit. Other popular amounts are 1.5x or 2x earnings and a flat $100,000 benefit that will, however, induce a tax burden to the employee for the additional amount over $50,000.
Almost all Basic Life Insurance is “Term” insurance, which simply means it has no residual value beyond the death benefit it insures. A product gaining in popularity as a company-sponsored payroll deduction item is “permanent” life insurance. “Perm” life insurance has enhanced value due to its earning interest or dividends over time or investment of excess premiums in different financial vehicles like mutual funds. This coverage is convertible to a personal policy should the individual leave the company, and premiums are almost always paid by the employee.
If you want to deal with facts vs. examples, ask your broker to get you 3-5 competitive life insurance quotes. Be sure to also ask about “freebies” that insurance carriers provide, too, in conjunction with the life insurance plan. These include benefits like will preparation tools, employee assistance programs, and more. Bottom line is that for $3-6 per employee, your company can provide an excellent benefit which will be much-appreciated during a time of serious need.
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