Group-Term Life Insurance
Group-term life insurance is where the employer pays a low group rate for the coverage, and the employee pays no tax on the first $50,000 of coverage.
Most employers offer group-term life insurance as an employee benefit, although other types can be offered. Term insurance is life insurance that is in effect for a certain period of time only. Generally, in the case of employer-provided term life insurance, the term is for as long as the employee is employed. Group-term life insurance can be offered to employees only, not to employee’s spouses and children.
To take advantage of the tax deduction for group-term life insurance (for instance, the value of up to $50,000 in insurance is tax-exempt for the employee), an employer must have at least 10 full-time employees. The 10-employee restriction does not apply if the following occur:
- The employer provides coverage to all full-time employees.
- The method for computing the amounts of insurance is set (such as a uniform percentage of the employee’s annual salary).
- No physical exams are required to obtain coverage.
There are other types of insurance that employers can offer besides group-term life, including the following:
- Group accidental death and dismemberment. Commonly known in the industry as AD&D, this coverage pays benefits to the employee’s beneficiary if death occurs due to an accident or if the employee loses use of portions of the body (loss of one arm and leg, for example, may result in payment of a percentage of the total benefits).
- Business travel accident insurance. This insurance covers only a narrow occurrence — the death of the employee while traveling on business. If employees do not travel or travel infrequently, this may not be a suitable investment.
- Split-dollar life insurance. This insurance pays the employee’s beneficiary when the employee dies and returns the premiums paid to the employer. The insurance is paid by both the employer and employee and has a substantial investment element to it. Employers may wish to consider this option for key employees only, as opposed to an entire employee group.Plans may offer an infinite number of riders that can be added to the plan and that allow employers to customize the plan to a degree. A rider is an additional feature or benefit that may be added to an existing insurance policy. For example, in the case of health insurance, a mental health coverage rider could be purchased that would add some coverage for mental health treatments to the basic medical insurance. In the case of life insurance, an accidental death and dismemberment rider could be added to a group-term life insurance policy that would pay double the death benefit if the employee died due to an accident. An insurance agent can explain the various riders available in conjunction with plans.
Once an employer has decided to offer life insurance, the employer must decide which employees will be eligible. Employers may want to offer group-term life insurance benefits to all full-time employees, particularly if lower rates are available (and individual medical exams are avoidable) with a larger group. If the employer plans to offer it as a special benefit to a few key employees, the employer will not be able to deduct the premiums for federal tax purposes, unless special nondiscrimination requirements can be met.
Generally, nondiscrimination requirements are designed to discourage employers from providing benefits only to the most highly compensated employees or providing benefits that limit lower compensated employees from participating because of the price of the benefits. In the case of group-term life insurance, a plan does not discriminate as to an employee’s eligibility to participate if any of the following conditions are met:
- The plan benefits at least 70 percent of all employees.
- At least 85 percent of all participating employees are not key employees.
- The plan benefits employees who qualify under a classification that is set up by the employer and found by the IRS not to discriminate in favor of key employees.
In the case of group-term life insurance an employer may offer life insurance to small subgroups of employees if the distinctions are based on the following:Marital status.
- Job duties.
- Length of service.
- Participation in a pension, profit sharing, stock bonus, or accident and health plan.
Other employment-related factors.
Amount of Coverage
Most group-term policies offer either a set amount of insurance (for example, a $10,000 policy for each employee) or are based on the employee’s salary (for example, policy values of one, two, or three times the employee’s yearly salary). In some cases, employers can allow employees to purchase life insurance in $1,000 increments, the cost of which is based on their age.
Example: An organization offers life insurance that can be purchased in $1,000 increments. The insurance vendor gives the employer the following rate schedule per thousand dollars of coverage purchased:
Employees under age 30 pay $.20 per thousand per month.
Employees between the ages of 30 and 40 pay $.22 per thousand per month.
Employees between the ages of 40 and 50 pay $.30 per thousand per month.
Carl, age 27, wants to purchase $5,000 of life insurance. He will have to pay 5 x $.20 = $1.00 per month for his insurance. Janet, 30, will have to pay 5 x $.22 = $1.10 for the same amount of coverage.
The cost of employer-provided group-term life insurance in excess of $50,000 is taxable to employees. This means that if an employer pays the premiums for employees’ life insurance, any premiums paid for more than $50,000 in coverage for one employee count as taxable income for that employee. In addition to the employee paying income taxes, the employee and the employer will both have to pay payroll taxes on the amount as well. It is possible for the employee to waive coverage amounts in excess of $50,000.
Example: Sports Heaven, Inc. pays the premiums on a $120,000 group-term life insurance policy on Karen, who is 46 years old. The monthly rate for employees in the 45 to 49 age group under the plan is $.29 per thousand. If Karen makes no contribution toward the plan, the cost of the $70,000 coverage ($120,000 – $50,000 exclusion = $70,000) counts as taxable income for Karen. The amount included in taxable income would be $243.60 for the year (70 [thousand-dollar increments] x $.29 [per thousand] times 12 [months]).
If Karen contributes $10 per month toward the coverage, then the taxable amount included as gross income for the year is $123.60 ($243.60 – $120 (Karen’s contribution) = $123.60).
Administering Life Insurance
On the whole, life group-term benefits are easy to administer because they do not require constant monitoring and may not generate many claims.
The insurance company chosen to administer the plan should provide the employer with the necessary forms to enroll employees. A copy of the enrollment document should be kept in each employee’s benefit file.
Designating a Beneficiary
The beneficiary is the designated person who will receive the money if an employee dies and the policy covers the death. Occasionally, the plan will allow people to designate several beneficiaries and to split the benefit into percentages. Employers should explain to employees the importance of keeping this information up to date by making changes to their beneficiary designation when appropriate; for example, when the employee does any of the following:
- Becomes legally separated.
- Becomes divorced.
- Has a child.
- When a spouse, parent, or other close relative dies.
- The insurance company should provide employers with forms for designating beneficiaries.
Proof of Insurability
Generally, with group-term life insurance, employees will not be asked to complete a medical questionnaire.
However, if employers offer employees the option of purchasing additional life insurance to complement what is provided by the employer, employees choosing to purchase the additional insurance may be required to complete a medical questionnaire. The employee may either mail the questionnaire directly to the insurance company or may return it to the employer to submit to the insurance company.
Part of the employer’s duty includes filing for life insurance benefits.
The employer will often receive information about an employee’s injury or death from the employee’s family, and will then need to complete the necessary forms to begin the claims process.
Example: An employee’s next of kin calls the employer to inform them that the employee has died or been killed. The employer must first notify the insurance company, which will provide the employer with the necessary forms to begin the claims process. The employer will need to obtain a certified death certificate, which is usually available from the funeral home/crematorium or directly from the deceased employee’s executor or next-of-kin. The employer should make a copy of the completed claim form and any supporting documents for the employer’s files. The claim should then be submitted to the insurance company via registered or certified mail.
If an employer has group-term life insurance, some policies may allow a conversion privilege when an employee leaves or changes employment.
This means that if an employee leaves or the life insurance offered by the employer is otherwise terminated, the employee may be able to obtain a private policy through the insurance agency. Generally, these policies are much more expensive than the group-term policy that the employer will offer, and sometimes they have low coverage limits and require proof of insurability.
Healthcare Consultants can help your employees with the following life insurance needs:
- Help guide them through the planning process
- Help them determine how much coverage they need
- Prepare an analysis tailored to their family’s unique needs
- Find the right life insurance carrier that fits their needs
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Depending on your age and the coverage amount desired, no medical examination is needed. Simply click the quote button above, and answer a few medical questions online. If you agree that the monthly premium is fair and affordable, you can pay the first month’s premium online – a 15-minutes process – and your coverage starts immediately. Otherwise, there is no obligation. Note that insurance is issued based solely on the medical questions and is subject to underwriting.
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