Let’s Talk Life Insurance

Life insurance is a valuable, affordable and generally easy benefit to offer employees. Here is an overview of group term life coverage and the provisions you need to be aware of.

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​Life insurance coverage can mean the difference between a family’s mere survival after a family member’s death, or being able to thrive. Typical uses of life insurance include payment of funeral or cremation costs, medical bills not covered by health insurance and other unpaid obligations. A more robust life policy can also replace lost family income, pay off a mortgage, secure college education funding, leave an inheritance to loved ones and/or contribute to charitable causes.  

"Family is not an important thing. It’s everything.” 
- Michael J. Fox

The Life Numbers
Those who know me, know that I like to delve into the numbers. First, there is a 100% chance that we will die. We all know that our days are numbered. It’s what we want to leave as protection and as a legacy for our loved ones that drives the purchase of life insurance. Did you know?

• Around 60% of Americans were covered by some type of life insurance in 2018, and about half of those individuals are under insured
• Consumers overestimate the cost of life insurance, thinking it costs more than 3x its actual cost
• Half of all consumers say they are more likely to purchase life insurance if it’s available without a physical examination requirement
• In 2016, the top three causes of death were heart disease, malignant tumors, and accidents
• Top accidental deaths are caused by poisoning (including drug overdose), motor vehicle accidents and firearm assaults

  
Term Life Defined
Individual life insurance, with a pre-set amount of time a person will be covered at a flat rate, is referred to as “term life” coverage. For example, a 10-year term life policy will charge the same premium for the first 10 years. The policyholder can continue the policy after that time if they wish, but annual premiums will increase every year.

Term life policies provided through an employer do not have a set time period of flat premiums; however, they continue coverage for employees as long as they are employed, and in some instances after they quit or retire. Group term life policy coverage amounts typically will start to decrease once a person reaches age 65 (the Age Reduction provision).   
 
Group Term Life Insurance
An employer-paid plan can provide basic protection to employees’ family members at a reasonable cost to the employer. It’s a great, inexpensive way to bolster benefits, creating a win-win. On average, an employer can implement a $25,000 term life policy for $5 to $10 per employee per month. Most employer-paid plans offer a level of Guarantee Issue (GI), with no health questions asked. For amounts over GI, there are only a few health questions asked of enrollees – no physicals, no lab work.
 
Whether an employer provides paid term life coverage or not, they can offer employee-paid voluntary life options.   There is typically a GI coverage level on voluntary life plans as well, but again, amounts over that threshold require only a health questionnaire. Plus, if an employee purchases life coverage for themselves, they are usually then able to purchase coverage for their spouse and children with GI coverage available without the completion of a health questionnaire.
 
Enhance Your Group Term Life Plan
Contract details matter. If you’ve never read through a group term life contract, I recommend you grab a few of your clients’ policies and peruse them. We’ve discussed two provisions already: 

• Guarantee Issue (GI) – this level of coverage is guaranteed regardless of the insured's health conditions
• Age Reduction – reduced levels of coverage for older insureds as they reach certain age thresholds, such as at age 65, 70, etc.

 
Other benefit provisions to watch for:

• Portability – provides continuation of the term life policy at group rates, although typically not available to those ending employment due to total disability or retirement
• Conversion – provides continuation of life coverage through the purchase of an individual, non-term life policy, with rates based on age and risk class at time of conversion
• Accelerated Benefits – if an employee is diagnosed with a terminal illness, they can receive an advance payment of a portion of their life benefits
• Definition of Salary – standard language includes base salary under the definition of salary; for groups who pay bonus and/or commission, be sure this is also included under the salary definition, since maximum coverage amounts are typically based on a multiple of salary

  
Life, Death, and Taxes
While term life proceeds are typically nontaxable to the beneficiary, IRS Code Section 79 outlines circumstances when the premiums paid for group-sponsored life coverage are taxable. Most agents know that Section 79 requires employees to pay tax annually on premiums for group-sponsored life insurance over $50,000. But there are other times when premium taxes come into play: discriminatory employer-paid plans, dependent employer-paid life plans, and employee-paid plans. Here is a summary of the four instances where the IRS imposes taxes under Section 79.

• Employer-Paid Nondiscriminatory Plans – the employer provides the same flat dollar amount or same multiple of salary to all covered classes; employees are taxed at Table 1 premiums for life coverage amounts over $50,000
• Employer-Paid Discriminatory Plans – the employer provides a higher flat benefit to Key employees, covers less than 70% of full-time employees, or more than 15% of insureds are considered Key employees; employees are taxed on the greater of actual premiums or Table 1 premiums for all life amounts provided to Key employees
• Employer-Paid Dependent Coverage – the employer provides coverage to spouse and/or children of employees; if the plan provides more than $2,000 of coverage per dependent, the employee is taxed at Table 1 premiums for that dependents's entire life coverage amount
• Employee-Paid Plan – employees must pay tax on premiums for coverage over $50,000 (employer-paid and employee-paid amounts combined); it is easiest to have employees pay for all voluntary life coverage premiums through post-tax payroll deductions

Table 1 rates are set under Section 79 rules. For more information, see our employer-facing PulsePoint articles on Employer-Paid and Employee-Paid Life coverage.
  
The Bottom Line
Life insurance is a great way for employers to expand benefits to employees without breaking the bank. Employees especially appreciate the ease of enrollment, without a required health exam, and at least a guaranteed level of coverage regardless of health conditions. When obtaining quotes, be sure to evaluate cost, coverage, and guarantee issue levels. Also lift up the curtain to ensure that portability and conversion are both allowed and commission/bonus amounts are included in salary if applicable. Employers should also be provided with information about benefit reductions due to an employee’s age, accelerated benefit provisions, and premium tax implications.  As always, the devil is in the detail.

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