If you are like many of us in the human resources practice, the COVID-19 pandemic has resulted in a higher than normal number of employer-sponsored life insurance claims. Or, perhaps the absence of employer-sponsored life insurance at your company has now been recognized as a gap in benefits that should be addressed.
Why are employer-provided group life products an important component of a Total Rewards Program?
More people are covered by employer-provided life insurance in the U.S. than purchase individual life insurance policies for themselves. This trend has increased steadily over the years, even though life insurance is widely available for private purchase. This may be because insurance is complex and confusing to many people. Increasingly, employees are relying on their employers to do the heavy lifting in vetting and selecting insurance products for them. Taking proactive steps to purchase an individual life insurance policy is something that many people are not emotionally or financially willing to do.
How much life insurance should I be offering to my employees?
Employees seek life insurance for many different reasons. The most common are to fund funeral and burial expenses, replace years of lost income, repay debts or supplement retirement plan balances. When offering employer-paid coverage, most employers target, at a minimum, covering the cost of a funeral. If that is your goal, has your coverage kept up with actual costs? Average costs of funerals in the U.S. now range from $6,000 to $12,000. Coverage to achieve that goal might be structured as a flat dollar benefit. (Example - $10,000 benefit.) Some employers take coverage a step further and seek to replace lost income. Coverage to achieve that goal might be structured as a multiple of earnings. (Example – 3X annual income benefit.) If there is a desire to offer coverage that helps the employee potentially repay debt or supplement retirement plan balances, those needs become very individualized. Providing options for purchasing employee-paid voluntary life insurance is critical to addressing those needs.
Can group life insurance premiums paid by the employer have tax consequences for the covered employee?
Yes, premium paid on benefits over a certain dollar amount may be considered taxable as imputed income to the employee. Ask your insurance consultant for information about your obligations based upon your plan design.
What features should I consider in the group life product I select?
- Coverage level designs that meet your Total Rewards objectives and employee needs.
- A mix of employer-paid and employee-paid options.
- Comprehensive family member coverage.
- Options for employees to increase or decrease coverage as their needs change.
- Portability / Conversion options at the time of termination.
- Administrative ease / claims processing efficiency.
How do I educate employees so they can make good choices about life insurance?
At the time of initial enrollment, or renewal points when increasing or decreasing coverage may be allowed, it is very important to give employees relatable examples of why life insurance benefits are of value to them and their families.
- For employees right out of school, it may be a discussion around outstanding student loans or co-signers for debt that they would not like to leave with the responsibility to pay back if they died.
- For employees with young families, examples might focus on providing replacement for years of lost earnings and allowing the family members to have sufficient funds for college and retirement.
- For employees nearing retirement, adequate coverage for funeral expenses and providing supplements to retirement plan balances for spouses may resonate.
Regardless of age, some employees have charitable, religious, or social causes they feel strongly about. Life insurance as part of their estate plans may allow them to make significant contributions to these organizations that they were unable to do in life. This use of life insurance is often overlooked unless it is explained as part of an educational effort.
And do not underestimate the value of partnering with your retirement plan advisor in these educational efforts. When your advisor understands the life insurance offerings of your company, they can assist your employees in building more comprehensive financial plans.
It gives not only your employees, but you, peace of mind. The loss of an employee or their family member is heartbreaking. At a time when there is little the HR professional can do, knowing that your company has provided a life insurance offering can give both you and the beneficiaries some small comfort.