Group life insurance has long been a staple item in benefits packages. Employees want it because it can ease worries they have about leaving family members financially unstable after they die. Employers like to offer it because it's cheap compared to other benefits like health insurance or retirement plans.
Unfortunately, it gets a little tricky when choosing a plan considering the different types of policies and various levels of coverage. Get the facts on how to get the right plan at the right price for your business.
What is group life insurance?
Group life insurance policies are taken out by an employer (the policy holder) and offered to employees (the insureds). As with any life insurance policy, if the employee dies, the benefit is paid to a beneficiary - often a family member - chosen by the employee.
There are two different types of life insurance: permanent and term. Permanent covers a person for life, as long as he or she is paying the premium. A term policy provides coverage for an allotted amount of time. Most group life insurance policies are term policies - covering employees only while they are working for your business. In most cases, once an employee retires or even takes a leave of absence, he or she isn't covered by a basic group life policy.
Although not the norm for small businesses, you can beef up a basic policy. Provisions like coverage of a spouse and children or coverage that pays out for a serious injury like dismemberment can be added on.
Most employers cover the basic premiums of group life insurance. If they offer additional coverage, employees will pay the extra cost. Group life is really designed to supplement a person's life insurance policy. Point out to your staff that they have the option to obtain additional life insurance through an individual policy when rolling out a group plan.
What you should offer
A typical policy for a small business will be a group term life insurance policy. Most small businesses can afford only the basics since the smaller you are, the more expensive your premiums will be.
Most policies set a minimum benefit at $10,000 per year. But a very common offering is a year's salary as the benefit. Businesses also often offer employees the option to increase their benefit by two, three, or four times their salary. Employees can "buy up" to get this extra coverage by taking on the additional benefit, as well as the additional cost.
You don't always have a choice, however, when it comes to offering coverage to employees who leave the company. Some states require employers to offer the option of continuing the life insurance policy, in which case the employee will pay premiums directly to the insurance company.
How much will it cost?
Group life insurance doesn't require medical exams, so the health of your employees will not factor into the cost. But generally, your employees' ages, sex, and salaries will. These variables are used to calculate a risk factor for each employee. Risk factors are then averaged to determine the premium.
Another aspect of the risk factor is business type. For example, an accounting firm, where employees sit at desks all day, will have a much lower risk factor (and premium) than a construction business.
The premium is factored on a per $1,000 of the benefit of the employee. You'll pay a price for every $1,000 of the total benefit that's paid out if the employee dies. The price per $1,000 is almost always less than a dollar and usually in the area of 10 cents to 25 cents.
Here's an example: Everything has been averaged in your business - the ages and sexes of your employees and your business type has been rated. The premium is set at 20 cents for every $1,000 of a benefit. If your benefit is one year's salary, employees who are making $50,000 will have a monthly premium of $10.
Most likely you'll get a monthly bill from your insurance agency with one lump sum made up of each employee's premium.
How to get a policy
You can purchase a policy directly from an insurance company or go through a broker, whose job is to compare different costs from different companies and clear up any questions you may have about policies. Because of the complexity of life insurance, it's a good idea to have a broker who can address your concerns and collect the right information for you. The majority of brokers will offer their services for free because they are paid by the insurance companies they represent.
If you do use a broker, check with your state insurance department to make sure he or she is licensed to sell life insurance. Likewise, check that any insurance company you are considering buying a policy through is licensed.
Other business life insurance
Coverage for your employees isn't the only time you should consider life insurance for your business.
Another popular policy is key man life insurance. That's a policy taken out on top-tier employees, whether it be the owner, CEO, or all of the executives. In this type of policy, the business is the beneficiary, so if any of these people critical to the business died, the business wouldn't immediately go bust.
If you're the owner of a business, you may find that in order for a bank to lend you money, you have to take out a life insurance policy on yourself, making the bank the beneficiary. Therefore, if you die, the bank won't lose its investment.
Reassess. Make it a point to re-evaluate your group life policy each year. If the average age or number of employees changes, your premiums could decrease.
Cafeteria plan. Life insurance is often times part of a cafeteria plan, a menu of benefits that an employee can choose from. If you don't think group life insurance will fit into your budget, try adding it as an option in a cafeteria plan.
Education. Inform your employees about group life insurance, how much coverage is offered, and how it will protect them. Employees should be aware that group life is generally considered a supplement and that it's a good idea to purchase an additional policy to protect their family financially. The Insurance Information Institute suggests a person should have a policy for five to eight times his or her salary.