Introduction to Group Life Insurance
Some small business owners offer group life insurance to employees. Group life insurance can be part of an employee benefit plan that is paid for by the employer or a voluntary offering, whereby the employee pays for the coverage.
For policies paid by a business owner, the benefit can often be equivalent to a full year’s salary, an amount that may not be sufficient for most people. These types of policies can be viewed as an added benefit or “supplemental” to other life coverage an employee may already have.
If an employee wants additional coverage on top of what an employer is willing to purchase, for double or triple times his/her salary as an example, he or she may have to pay for it individually instead. Purchasing additional coverage outside of what is offered through the group policy will likely require that the employee undergo a medical exam to determine the level of insurability based on his or her health. However, a voluntary life insurance policy can provide significantly more coverage, depending on the amount of money an employee wants to spend individually for that type of policy.
Group life insurance policies tend to be less expensive than those purchased individually based on the fact that many group policies are only effective while an employee within the group is employed at that particular company. Most group life insurance is sold on a term basis. Term life insurance pays a death benefit if the policyholder passes away within a specified time period.
In general, term life insurance is much less expensive than permanent life. In fact, term life premiums have decreased markedly during the past decade due to the fact that Americans are living longer on average.
To figure out a group rate, the insurance company will usually consider the following factors about a business:
- Number of employees within the group
- Average age of employees
- Ratio of female to male (based on the statistic that women tend to live longer than men)
- Number of smokers
- Risk-factors associated with the business
Based on the business risk, for example, a marketing firm would probably have a lower group rate than a roofing company for equivalent coverage.
Generally, group life insurance policies are “guaranteed issue,” meaning that employees don’t need to undergo a medical examination to be eligible. An employee who has a serious medical condition may still be a part of the group, as long as he or she is still an active worker. However, a employees out on disability leave are not eligible for group life insurance until they return to work, unless they went on leave after the policy had been issued.
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Tips & Considerations Concerning Group Life Insurance
- If you decide to offer group life insurance to employees, shop around for the best rates and packages through several insurance companies/agents first. You may want to purchase all of your group packages (health, disability, etc.) through one company/agent after you have assessed all your options in order to make it easier to track policies and make payments.
- Review your group plans regularly as your business grows. Examine how your group life insurance needs and premiums may change as a result of added employees or new capabilities your company offers.
- If you’re going to provide workers with voluntary group life insurance, check whether the policy you’re offering allows them to carry the plan over to a new company should they decide to change jobs. Also see if there are additional stipulations in the policy that can make it more flexible for the employee, such as a waiver of premiums when a worker is on disability leave and may not have the funds to pay for the policy during that time.
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Introduction to Key Person Life Insurance
Within a small company, there are typically some “key people” who are critical to the success of the business. These individuals may be limited to the business’ founders or partners, or defined more broadly to include other employees responsible for running a critical aspect of the business, such as the senior marketing or sales manager, chief engineer or software developer in the case of a technology company.
The death of any of these key people would likely cause serious impact on the business’ bottom line. Therefore, many small firms choose to purchase Key Person life insurance policies on these very important employees. As the policy owner, the company is the beneficiary and receives the proceeds when the insured key employee dies. The payout can help the company by providing:
- Cash to weather the loss and continue operations until a new employee can be hired and trained to carry out the functions of the deceased.
- The funding to buy out the key person’s heirs, if ownership rights of the business are involved.
In some cases, a small business seeking a loan from a bank or trying to raise capital from outside investors may be required by the lender or investor to carry life insurance for its partners. The bank may even require that the small business provide a collateral assignment agreement that gives the bank first rights to the policy proceeds to cover outstanding loans due in the event of one of the owner’s deaths.
Types of Key Person Policies
Like individual life insurance policies, Key Person life insurance policies may be purchased as term life or permanent life policies.
- Term life insurance covers the insured for a term of one or more years. It pays a death benefit only if the insured dies within that term. Term insurance generally offers the best value for your premium dollar. However, it does not build up cash value. It may not be renewable at the end of the term or may cost considerably more to continue.
- Permanent life insurance, which goes by several names, such as whole life, universal life and variable life, typically includes both a death benefit and cash value. Because of the cash value element, premiums tend to be higher than for term life insurance.
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Tips & Considerations Concerning Key Person Life Insurance
A number of factors can affect life insurance premiums. These include:
- The age of the insured and his/her overall health. Life insurance companies typically ask about the insured’s medical history, request access to medical records and even obtain blood and urine samples for testing.
- Pre-existing and/or chronic health problems, such as diabetes, heart disease or cancer. These conditions may prevent a person from getting life insurance or can place him/her in a high-risk pool and therefore subject to higher premiums.
- Poor health habits, such as smoking and excessive drinking. These habits can trigger higher premiums. Be aware that insurance companies may look back and consider these behaviors for the past five years.
- Engaging in dangerous hobbies, such as skydiving, skiing or rock climbing.
- The insured’s driving record, in terms of accidents, DWI/DUI citations, claims and tickets. The better his/her driving record, the better rates he/she will receive for life insurance.
- The insured’s geographic area. Life insurance companies have access to regional data that documents mortality rates and life expectancy, and they use that data to calculate the rates they offer.
In purchasing Key Person life insurance, consider the following:
- Consult with your accountant and financial advisers to determine which individuals in your company are critical to its financial success and what monetary contribution each key person makes to the company annually to decide what size policy to purchase. Think more broadly than just the founder or partners; consider other key employees that add significantly to the company’s bottom line.
- One way to determine the amount of a key person’s life insurance coverage is to utilize a multiple of that individual’s annual salary, for example, two to five times his or her current salary. However, the actual amount of coverage some companies choose may be significantly higher; for example, to cover the buy-out of the deceased’s share of the business. Other considerations in determining the amount of coverage:
- How much would it cost to replace the key person, both in terms of salary and training costs?
- How much does the key person contribute to the company’s bottom line annually?
- How many years would it take to get a replacement performing at the same level as the key person?
- What level of premiums can the company afford?
- It’s typically advisable to buy Key Person life insurance when the company is formed. Going without this insurance leaves the company at risk, and it also opens the possibility that the key people could later develop health problems that would make insuring them more expensive.
- As with all insurance, shop around and compare rates for comparable coverage from a variety of insurers.
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