Offering Life Insurance: The Basics
Life insurance is one of the most common employer-provided benefits. This article covers the basics you should know, from types of coverage to promoting it to your employees.
Types of Life Insurance
Life insurance is divided into two categories: term and permanent. Term life insurance has a specified coverage period (term), but can usually be renewed or converted into a permanent policy at the end of a term. Premiums are generally affordable initially, but can increase substantially when renewed.
Permanent life insurance is life-long coverage that generally also includes a cash value savings component. There are many types of permanent life insurance, including whole, universal and variable. This type of coverage has higher premiums, but offers more long-term value.
Employer-sponsored coverage can be offered in a variety of ways. Employers may offer a term policy, permanent coverage or both. Cost-sharing also varies, as some employers cover the full cost, some require employees to pay the full premium and others split the cost with employees.
A common scenario is an employer offering a group-term policy at no cost to the employee, with a coverage amount that is a multiple of annual salary (usually one to five times annual pay). Group-term policies often end when an employee leaves the organization (or dies), but employees may be able to convert it to a permanent policy or renew it upon leaving. This is generally an affordable plan for employers to offer, though it does not offer as much long-term value to employees as a permanent plan.
Many employers who offer such a group-term policy also offer additional voluntary coverage options, in which the employee pays the full cost but still realizes the benefit of group rates and payroll deductions. Additional coverages offered may include:
Premiums for life insurance offered by the employer are generally deductible as ordinary and necessary business expenses (unless the employer is the beneficiary of the policy). In addition, the cost of employer-provided group-term life insurance is excludable from the employees’ gross income (up to $50,000 of coverage). The plan must meet special nondiscrimination rules, however, or key employees may not be eligible to exclude the cost of their coverage from their gross income.
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