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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