Voluntary Benefits
Voluntary life insurance is offered to employees as an optional benefit, and often employers will pay the small premium as an employee retention tool and to provide workers some peace of mind for their families.
There are various avenues for funding these group plans, and different underwriting criteria that can either reduce or increase the premium amounts.
The employer may cover the premium directly, or employees may share in the premium burden through payroll deductions after tax. In most cases, life insurance face amounts will vary from policy to policy and will usually be based in part on each employee’s base salary.
Taxation
Employers often provide group term life insurance at no cost to the employee, usually with a benefit equal to a percentage of base salary.
Internal Revenue Code Section 79 governs the taxation of this employer-provided life insurance. An employee can receive up to $50,000 worth of coverage tax-free.
The cost of any insurance above $50,000, less any amount paid for the insurance by the employee, is taxable income to the employee.
Types of group life insurance
There are three different categories for group life coverage, as follows:
Guaranteed underwriting – Automatic enrollment is granted to all eligible employees who apply. But they must meet eligibility requirements that the employer and insurance company negotiate.
Guaranteed underwriting requires little paperwork, there is no medical exam and it is issued quickly. It is usually only provided for large groups where employees cannot be denied.
To qualify for guaranteed issue, employers usually agree to a minimum percentage enrollment.
Simplified underwriting – There is no blood test, no urine test and no medical exam is required. Each applicant usually answers several health-related questions in addition to agreeing to a medical record background check.
Full underwriting – Medical exams are typically required, and a full examination is taken to satisfy the full records check requirement. Full underwriting is usually required with small groups, with individuals or on larger face amounts.
Because of the more thorough vetting, the application process takes longer to complete and not all people will qualify.
Why offer group life?
Premiums are typically quite low and that’s why employers will often offer this benefit at no cost to their employees.
It’s a great selling point when attracting new talent and retaining your employees.
It also benefits those employees who otherwise would not purchase life insurance on their own, either because of apathy or they may not be able to afford individual life insurance policies.
Group life also allows higher-risk individuals to be given life insurance coverage where they may have a harder time obtaining coverage on their own.
As a rule, experts recommend people purchase eight to 12 times their yearly wages in life insurance when working full time. If workers are young and have a long career ahead of them, experts recommend they purchase even more coverage. This is especially true for people with multiple dependents.
Produced by Risk Media Solutions on behalf of AmCom Insurance Services. This article is not intended to provide legal advice, but rather perspective on recent regulatory issues, trends and standards affecting insurance, workplace safety, risk management and employee benefits. Please consult your broker or legal counsel for further information on the topics covered herein. Copyright 2019 all rights reserved.