Life Insurance How to buy group life insurance for your small business Written by: Penny Gusner Penny Gusner Penny is an expert on insurance procedures, rates, policies and claims. She has extensive knowledge of all major insurance lines -- auto, homeowners, life and health insurance. She has been answering consumers’ questions as an analyst for more than 15 years and has been featured in numerous major media outlets, including the Washington Post and Kiplinger’s. | Reviewed by: Michelle Megna Michelle Megna Michelle, the former editorial director, insurance, at QuinStreet, is a writer, editor and expert on car insurance and personal finance. Prior to joining QuinStreet, she reported and edited articles on technology, lifestyle, education and government for magazines, websites and major newspapers, including the New York Daily News. | Posted on December 7, 2009 Why you can trust Insure.com Quality Verified At Insure.com, we are committed to providing honest and reliable information so that you can make the best financial decisions for you and your family. All of our content is written and reviewed by industry professionals and insurance experts. We maintain strict editorial independence from insurance companies to maintain our editorial integrity, so our recommendations are unbiased and are based on a comprehensive list of criteria. Last updated June 7, 2010 If you own your business, you may have started it with only one employee – you. But as you’ve grown in numbers, you may have discovered that attracting and retaining top-notch employees means offering a variety of benefits, including group life insurance. 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 (paid for by your employees), 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. 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. Small business owners should interview prospective brokers and check references. Larger brokers can also handle your business’s property/casualty insurance contracts. People who are offered life insurance through work almost always take it. According to a July 2009 National Compensation Survey from the U.S. Bureau of Labor Statistics (BLS), 62 percent of workers have access to life insurance and almost as many, 60 percent, participate. Life insurance is one of the top benefits, outside of healthcare that can be offered by employers,” says Jennifer Hader, director of product strategy, development and management at CIGNA Group Insurance. “In order for companies to keep their benefits package competitive, it’s important to include life insurance – whether funded by the employer, by the employees, or both.” Starting points 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 plans generally offer term life insurance, which provides purely insurance protection, although group universal life is also available, which adds side fund accounts for employees that 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 54 percent of workers in plans, while 40 percent used a flat-dollar amount. (Other plans offered variable multiples 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, 58 percent of workers are offered 1x salary, 14 percent are offered over 1x and under 2x, 24 percent are offered 2x, and 4 percent are offered more than 2x. Among those with flat-dollar amount plans, one-quarter of all participants receive $10,000 or less, half the participants receive $15,000 or less, three-quarters receive $25,000 or less, and just 90 percent of participants will receive $50,000 or less. 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. Group life insurance costs Your company’s group life policy will be priced based on your company size, the average age of your employees, males vs. female ratio and your industry. A manufacturer will pay more than, say, a white-collar company. Larger companies that already have policies in place, will also pay based on past claims. Tax implications of group life insurance 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. Even if only one of your employees 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. When to examine your group life plan Just as you need to periodically evaluate your own individually held life insurance, you should 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. “Brokers are trusted advisors who can help companies develop a plan design that best meets the needs of their client’s organization and budgetary requirements. Brokers do the comparative shopping and make recommendations doing the “legwork” for the client. Ultimately, the client makes the benefit buying decision,” Hader says. 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. According to Hader, because each employee has different life insurance, “I would suggest employees use the tools and information made available to them by the carrier, such as calculators and scenarios that help them decide the amount of coverage that may satisfy their needs.” 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.