Introduction
Group term life insurance is a form of term life coverage made available to members of a specific group, such as employees of a company, members of a trade association, or alumni of a school. It provides straightforward protection against premature death without building cash value, making it an affordable and convenient benefit for both employers and employees. Employers often structure plans with flat coverage amounts or as a multiple of an employee’s salary, offering a cost-effective way to extend financial security. Because premiums are typically lower than those for individual policies and underwriting requirements are minimal or waived for lower coverage levels, group term life insurance can be an attractive addition to an employee benefits package.
Eligibility information
As an employer, you can choose to include all of your employees in a group term life insurance plan, or select only a class of employees, such as managers. You can also exclude certain employees from coverage. For instance, you could require employees to work a minimum number of hours per week, such as 20, before they would qualify for coverage. You could also exclude employees based on the number of months worked per year, such as requiring at least five months of work in order to obtain coverage. Or, employees may have to have been employed for a certain period of time before they are eligible to participate.
A business can start group coverage with as few as 2 employees, though most employers begin thinking about offering coverage when they have 10 or more employees. The number of employees may determine whether an insurer will offer immediate coverage without evidence of insurability. Plans that limit coverage to $50,000 or less usually skip any medical underwriting requirements; amounts over $50,000 may require individuals to answer medical questions and satisfy underwriting standards to be accepted.
Bells and whistles
Some group term policies may offer supplemental coverage (for a spouse) or dependent coverage (for children). These coverage amounts often carry limitations. For instance, the spousal coverage may be limited to 50 percent of the employee’s amount, while dependent coverage may be a flat amount, such as $2,000.
Some policies also offer an accelerated death benefit that allows an employee with a terminal illness to collect a percentage of his or her coverage in advance. When employees leave your firm or retire, they may also be able to keep the coverage as personally owned term insurance, or convert the group term to permanent life insurance. Available options vary among insurers, so be sure to ask about features that are important for your business needs and for your employees.
What’s in it for the employees?
Essentially, group term coverage can represent free life insurance for an employee. But because many employers limit group term coverage to $50,000, employees should often think of this coverage as supplemental to their own personal life insurance plans, not as their main source of protection.
Employers often stop at $50,000 of coverage for tax reasons. The cost to provide coverage of up to the $50,000 limit is deductible by the employer but not includable in the income of the employee. Also, an employee’s beneficiary will not pay federal income taxes on the death benefits. A state may, however, require income taxes on the death benefits.
Employers that pay for more than $50,000 of group term coverage must include the “economic value” of the cost of the excess insurance as taxable income to the employee (reported on their W-2s as “additional compensation”). One way around these limitations is for an employer to pay for the first $50,000 of coverage and allow employees to pay for any optional coverage in excess of this amount.
What’s in it for the employer?
As the employer, you can offer different coverage amounts for different classes of employees. For example, you might buy $50,000 of coverage for your customer service personnel, but buy coverage for your engineers equal to three times their annual salaries. The downside is that if you do “discriminate” among different classes of employees, the economic value of the cost of the first $50,000 of coverage may be taxable to your key employees (i.e., certain officers, highly compensated individuals, and owners with 5 percent or more ownership).
As mentioned, you may pay all or part of the cost of group life coverage, and many employers pass on the costs of any additional features to their employees. The good news, from a federal income tax standpoint, is that group term life premiums paid by an employer are tax deductible by the business, even if your plan is discriminatory.
Also note that the way your business is organized will affect your business tax benefits. Owners of more than 2 percent of an S corporation, partners, and sole proprietors are not considered employees, so premiums paid for their group term insurance are generally not tax deductible. In a corporation that is not an S corporation, premiums paid for all employees (including owner-employees) are generally tax deductible.
Cost concerns
Typically, you can expect to pay a set amount per $1,000 of coverage per employee (e.g., $.10 per $1,000 per month). Premium costs depend on the coverage amounts you want to provide and whether medical underwriting is required. Premium costs will also depend on the number of employees, their ages, their genders, and the type of business you operate. For instance, a commercial fishing fleet will probably pay more in premiums than a bookstore.
For any type of business, though, you can expect costs to rise as your employee population ages. In general, the larger the group of employees, the lower the premium charged. And just like many group health plans, an insurer may also charge higher life insurance premiums for smokers than for nonsmokers.
Conclusion
Group term life insurance can be a valuable component of an overall benefits program, offering affordable, accessible protection that helps employees supplement their personal coverage. For employers, it serves as a competitive advantage in recruiting and retaining talent while providing potential tax deductions on premiums paid, depending on business structure. However, coverage limits, tax implications above $50,000, and increasing costs as employees age should be factored into the plan design. By tailoring eligibility requirements, coverage amounts, and optional features, a business can create a group term life program that balances cost control with meaningful protection for employees.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
