When you founded
your small business, you likely started with one employee: You. But as
you've grown, you found that in order to attract and retain top-notch
employees, it pays to offer a variety of benefits, including group life insurance.
Those who are offered life insurance
through work almost always take it. According to the March 2007
National Compensation Survey from the U.S. Bureau of Labor Statistics
(BLS), 58 percent of workers have access to life insurance and almost
as many, 56 percent, participate.
| Judging group life insurers
Financial strength. An insurance company's financial status is the best indicator of its ability to pay claims.
Who they insure.
Does the insurance company focus on small businesses with fewer than
100 employees, or does it tend to insure businesses with 500 employees
or more? The answer is a good indication of their expertise with a
company of your size.
Product features.
If you're offering voluntary group life insurance (which is paid by the
employees), it is wise to look at insurers that offer such features as:
policy portability, which allows employees to continue coverage after
they have left the job or retired; accelerated death benefits, which
pay out money from the death benefit to the employees if they become
terminally ill; and waiver of premium benefits, which allow employees
to skip premium payments for a certain period of time when they are
sick or disabled.
Get broker recommendations. A good
insurance broker can make all the difference in finding an appropriate
group life plan for your small business. Jacobsen of CIGNA advises
group life shoppers to seek out broker recommendations from other
owners of businesses of comparable size. A local chamber of commerce
can be a good networking source for exchanging information on employee
benefits.
Jacobsen also recommends that small business owners interview
prospective brokers and check references. Larger brokers can also
handle your business's property/casualty insurance contracts.
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"There's an expectation
that there will be group health and group life," says Jim Jacobsen,
Vice President of Product Development at CIGNA Group Insurance, one of
the top six sellers of group life. "Group life is a big value-add
because not a lot of premium is required to provide group life."
In
addition, group life insurance is a good supplement to a person's
existing individual life insurance and comparatively quite inexpensive.
There are many ways you can offer group life
depending on your budget and how attractive you want the benefit to be
to employees.
For starters, group life offerings are generally
group term life, which provides purely insurance protection, although
group universal life is also available, which adds side fund accounts
for employees who want a way to supplement retirement income. Group
life policies are offered on a guaranteed issue basis, meaning no
medical exam is required from any of the employees who will be insured.
Your employees will likely expect you to pay for a
basic level of group life. According to the BLS, 94 percent of workers
with life insurance do not have to contribute toward its cost. You can
offer to provide coverage based on a flat-dollar amount (such as
$10,000 per employee) or based on a multiple of a person's salary (such
as one or two times salary). The BLS reports that the "fixed multiple
of earnings" formula is used for 55 percent of workers in plans, while
37 percent used a flat-dollar amount. (Other plans offered variable
mutiples or variable dollar amounts.)
Part-time workers, union workers and workers with
average wages of less than $15/hour were more likely to be in
flat-dollar amount plans.
It is common for businesses to offer different
group life programs based on various classifications of employees. For
example, a manufacturer may offer a flat-dollar amount to union
employees and a salary-multiple package to managers.
According to the BLS, among workers with "fixed
multiple" group life plans, 56 percent of workers are offered 1x
salary, 13 percent are offered over 1x and under 2x, 26 percent are
offered 2x, and 4 percent are offered more than 2x.
Among those with flat-dollar amount plans, 12
percent have less than $10,000, 45 percent have $10,000 to under
$20,000, 24 percent have $20,000 to under $30,000, 3 percent have
$30,000 to under $40,000, 2 percent have $40,000 to under $50,000, and
14 percent have $50,000 or more.
On top of that, you can add "voluntary group life,"
which allows employees to buy more coverage at their own expense but at
bargain group life prices. However, depending on the insurer and the
amounts, they may have to answer medical questions and provide
"evidence of insurability" in order to buy extra coverage.
| Tax implications of group life
If
you as an employee receive more than $50,000 annually in group term
life insurance benefits, Uncle Sam will hit you with a tax bill.
The
cost of death benefits on group term life policies of $50,000 and under
is not includible in the covered employee's income. However, if your
death benefit is greater than $50,000, the cost of the excess is
taxable.
For example, let's
say you have a $100,000 group life insurance policy, and your employer
is paying 25 cents per $1,000 of coverage — or $25 a month — for this
policy.
Since the first $50,000
is not includible in your income, you will only have to include imputed
income on the cost for the remaining $50,000 in coverage. The way the
income amount is determined in this case, however, has nothing to do
with the employer's premium costs.
The
amount includible in your gross income is determined by multiplying the
amount of excess coverage by a cost per $1,000 given in the Uniform
Premiums for $1,000 of Group Term Life Insurance Protection table at
your age.
If you are age 40, for example, the amount of
imputed income is $.10 per month for each $1,000 of excess group term
life insurance. Since the excess group term life insurance is $50,000,
in this case you could expect to have imputed income of $5 each month,
or $60 for the year on which you would pay income tax. You will be
taxed at your ordinary income tax rate.
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Your company's group life policy will be priced
based on your size, the average age of your employees, the mix of males
and females, and your industry. A manufacturer will pay more than, say,
a white-collar company. Jacobsen says that for larger companies that
already have policies in place, experience (meaning past claims) will
also come into play in pricing.
And even
if only one employee suffers from a severe medical condition (such as
cancer or diabetes), the condition does not affect the group's rate as
long as the person is actively working. An employee still is covered
when he or she takes a leave of absence because of a medical condition
that occurs after the policy has been issued.
Costs for providing each $1,000 unit of insurance
can vary greatly. Jacobsen has seen 6 to 9 cents per $1,000 on the low
end, to up to 40 to 60 cents per $1,000. Overall, employers paid $145 in premium per
life (for new sales) and workers paid $245 for voluntary group life in
2006, according to GenRe's "2007 Group Life Market Survey." Average
face amounts were $67,566 and $72,764, respectively.
Just as you need to periodically evaluate your own
individually held life insurance, so must you evaluate your business's
group life, especially if you are experiencing significant growth or
downsizing. This is where having the right broker is especially
important.
"Your broker needs to understand the dynamics of
your small business — how fast it's growing, how fast the demographics
of your group are changing — to determine whether your plan is still
appropriate," says Jacobsen.
Employees who can choose coverage levels should
examine their own changing situation, too. Employees should view group
life insurance as a supplement to existing individual life insurance
coverage, since one year's salary is not enough to support an
employee's survivors. Jacobsen says, "People need to be educated and
look for ways to determine how much life insurance they need. Find out
how much you need with an online calculator."
Insure.com's Life Insurance Needs Estimator Tool can help you pinpoint your number.
An increasing number of small businesses are going
above and beyond the traditional offerings of group health and group
life. Soon you may be considering adding benefits like identity theft
insurance and will preparation.
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