Employer-sponsored life insurance - How is it different?
by Guest » Wed May 05, 2010 11:38 am
Our employer has decided to offer life insurance benefits to some of us in the organization. Would it be a good option to have employer-backed life insurance?
Total Comments: 13
Posted: Wed May 05, 2010 02:31 pm Post Subject:
If you are in reasonably good health, you will be much better off buying your own individually owned policy. Here's what I wrote in my blog post regarding group life insurance: http://www.terminsurancebrokers.com/blog/2010/04/07/11-group-life-insurance-cost
We get many requests for life insurance quotes, often from people looking to supplement their coverage under a group life insurance policy, or looking to replace that coverage. Most employers that offer group life insurance pay for the coverage either up to the employee’s salary, or a multiple of that salary.
Additional coverage is sometimes offered for an additional cost to be paid by the employee. The cost for the additional coverage may be low for a younger person (in their 20’s, 30’s, or 40’s), but group coverage most often has premiums banded in 5 year intervals. For example, a given rate is charged for someone between ages 35-39, a higher rate for 40-44, and so on. Group life insurance also has some major limitations:
1. If you are in good health, you are being charged a higher rate than you may be able to get by purchasing your own individual life insurance policy.
2. Coverage is limited, usually to a multiple of your salary. Often this multiple does not adequately cover the total needs in the event of death. Someone making $75,000 per year may be able to get up to $300,000 of group life insurance, but may have a need for $1,000,000.
3. If you leave the company, you lose the insurance. Any portion the employer pays as a benefit is usually eliminated.
4. If you leave the company and are offered the chance to convert and keep your coverage, it will often be very, very expensive.
5. You don’t own the coverage. If your employer goes bankrupt, you may be left with nothing.
6. The cost of insurance as you reach older ages on a group policy such as 60, 65, and 70, becomes very expensive compared to the cost of buying your own life insurance policy.
When you purchase your own life insurance policy, you can lock in the benefit amount that YOU choose for the amount of time that YOU want. Your premiums are guaranteed never to increase for the period of time that you choose. Your total premium outlay over that time period will almost always be less expensive than group life insurance unless you are in very bad health.
Posted: Thu May 06, 2010 02:32 am Post Subject:
A few considerations, mostly having to do with cost. As dgoldenz has pointed out, if you are in good health, applying for individual and fully underwritten life insurance is almost always the cheaper option.
But...
Our employer has decided to offer life insurance benefits to some of us in the organization. Would it be a good option to have employer-backed life insurance?
Why some of you?
You're employer isn't really backing the policy, merely offering a benefit to you.
Posted: Thu May 06, 2010 05:12 am Post Subject:
Our employer has decided to offer life insurance benefits to some of us in the organization. Would it be a good option to have employer-backed life insurance?
You don't discuss how large the company is. If more than 20 full-time/full-time equivalent employees, and this is a group plan, it must be offered to all employees -- there cannot be any discrimination (except between classes of employees, but not within a class of employees). If the insurance is being offered to a select group of employees, then IRS regulations generally require that the employees must either be 5% or better owners, senior executives (VP-level), or "highly compensated" employees ($110,000/year income, not including stock/bonuses) to be able to lawfully discriminate against the other employees.
"Employer-backed" makes no sense, unless you are speaking of "corporate owned life insurance" (COLI) in which the company is the owner & beneficiary of the policy. If that's the case, what you believe is an "offer" of insurance may actually be the required disclosure and consent form you must sign, acknowledging that you and your heirs have no economic interest in the policy, and that you agree to cooperate in the underwriting process. If this is true, and you (or other employees) misunderstand the nature of the insurance, it could end up being a huge problem for the employer. "Informed consent" means exactly that, you have been informed and you understand, and agree with, the implications.
If, on the other hand, your employer is offering to pay the premium for a personal life insurance policy on your life, and you get to name your own beneficiary, then the premium for any amount of insurance in excess of $50,000 needs to be "imputed" to you for income tax purposes, otherwise the death benefit would be a taxable event when paid to your beneficiary. This is the same for any group life insurance benefit.
There is more to your situation that needs to be shared. We need a little more information to be able to give you better answers.
Posted: Fri May 07, 2010 12:51 pm Post Subject:
You're employer isn't really backing the policy, merely offering a benefit to you.
I've known some of the key employees in our organization also receiving such benefits. I guess they refer to it as a Keyman's insurance.
Posted: Fri May 07, 2010 02:17 pm Post Subject:
Not necessarily. "Key person" life provides compensation to the business in the event of the death of the employee, and they can use the money for any purpose. In a policy issued as a backstop for a deferred comp plan, the company/plan is the beneficiary, but the proceeds are used essentially to pay the employee's deferred comp benefit to the employee's beneficiary. In either case, the company does not get a deduction for the premiums paid for the insurance.
In a deferred comp plan, the company receives the life insurance death benefit without taxation, but the deferred comp money paid to the employee's beneficiary creates a taxable event as far as any "gain" is concerned (since no real money goes into a non-qualified deferred comp plan, everything paid = gain). Even when paid with the tax-free life insurance money.
Policies written for deferred comp plans are always cash value (usually UL or VUL). Many companies use the cash value (not in excess of cost basis) for other purposes, since they can reasonably expect not to have to pay 100% of the plan assets out at one time.
Posted: Sat May 08, 2010 11:56 am Post Subject:
I've often heard people saying that the employer-issued life plans are not good, since these plans are not aimed at satisfying their individual needs. Do you all support this view?
Posted: Sat May 08, 2010 01:21 pm Post Subject:
employer-issued life plans are not good
Completely disagree. Anything provided by one's employer, if the benefit will go to the insured person's beneficiary, is a positive thing.
Some employers provide $25,000-$50,000 of basic group term insurance. In many plans, employees can obtain additional (optional) coverage, perhaps up to 5x their annual income, at the group rate. This is favorable compared to most individual policies.
Problem is, when you leave the group, you lose the group insurance. You can convert to an individual plan, but it will be more expensive. Other individual insurance might be less expensive, but due to health issues you might not qualify, and would have to pay the higher premium to keep the coverage. But at least it would be available.
these plans are not aimed at satisfying their individual needs
Absolutely true. The employer usually provides the benefit (1) to attract some employees to the job, and (2) to assist in keeping those employee on the job and not out looking for work somewhere else. Does the employer intend for the benefit to be a person's only need? No way.
Does that mean it is supposed to be sufficient for that person's needs. Of course not. That's what "personal responsibility" is all about. If your beneficiary would need more than $50,000 (most workers do) following your death, then you need to get more coverage -- individually.
Posted: Sun May 01, 2011 06:08 pm Post Subject: group life insurance
what percentage of employees die while actively employed and collect on group life insurance
Posted: Mon May 02, 2011 05:59 am Post Subject:
ZERO percent of employees covered by group life insurance die AND collect a benefit. It is an impossibility.
Next question?
Posted: Wed Mar 14, 2012 08:35 pm Post Subject: what percentage of employers
what % of employers offer 100% free group basic life insurance?
Or what is the percentage of employers who dont pay 100% for basic group life insurance and employees contribute to it? :shock:
Posted: Wed May 05, 2010 02:31 pm Post Subject:
If you are in reasonably good health, you will be much better off buying your own individually owned policy. Here's what I wrote in my blog post regarding group life insurance: http://www.terminsurancebrokers.com/blog/2010/04/07/11-group-life-insurance-cost
We get many requests for life insurance quotes, often from people looking to supplement their coverage under a group life insurance policy, or looking to replace that coverage. Most employers that offer group life insurance pay for the coverage either up to the employee’s salary, or a multiple of that salary.
Additional coverage is sometimes offered for an additional cost to be paid by the employee. The cost for the additional coverage may be low for a younger person (in their 20’s, 30’s, or 40’s), but group coverage most often has premiums banded in 5 year intervals. For example, a given rate is charged for someone between ages 35-39, a higher rate for 40-44, and so on. Group life insurance also has some major limitations:
1. If you are in good health, you are being charged a higher rate than you may be able to get by purchasing your own individual life insurance policy.
2. Coverage is limited, usually to a multiple of your salary. Often this multiple does not adequately cover the total needs in the event of death. Someone making $75,000 per year may be able to get up to $300,000 of group life insurance, but may have a need for $1,000,000.
3. If you leave the company, you lose the insurance. Any portion the employer pays as a benefit is usually eliminated.
4. If you leave the company and are offered the chance to convert and keep your coverage, it will often be very, very expensive.
5. You don’t own the coverage. If your employer goes bankrupt, you may be left with nothing.
6. The cost of insurance as you reach older ages on a group policy such as 60, 65, and 70, becomes very expensive compared to the cost of buying your own life insurance policy.
When you purchase your own life insurance policy, you can lock in the benefit amount that YOU choose for the amount of time that YOU want. Your premiums are guaranteed never to increase for the period of time that you choose. Your total premium outlay over that time period will almost always be less expensive than group life insurance unless you are in very bad health.
Posted: Thu May 06, 2010 02:32 am Post Subject:
A few considerations, mostly having to do with cost. As dgoldenz has pointed out, if you are in good health, applying for individual and fully underwritten life insurance is almost always the cheaper option.
But...
Our employer has decided to offer life insurance benefits to some of us in the organization. Would it be a good option to have employer-backed life insurance?
Why some of you?
You're employer isn't really backing the policy, merely offering a benefit to you.
Posted: Thu May 06, 2010 05:12 am Post Subject:
Our employer has decided to offer life insurance benefits to some of us in the organization. Would it be a good option to have employer-backed life insurance?
You don't discuss how large the company is. If more than 20 full-time/full-time equivalent employees, and this is a group plan, it must be offered to all employees -- there cannot be any discrimination (except between classes of employees, but not within a class of employees). If the insurance is being offered to a select group of employees, then IRS regulations generally require that the employees must either be 5% or better owners, senior executives (VP-level), or "highly compensated" employees ($110,000/year income, not including stock/bonuses) to be able to lawfully discriminate against the other employees.
"Employer-backed" makes no sense, unless you are speaking of "corporate owned life insurance" (COLI) in which the company is the owner & beneficiary of the policy. If that's the case, what you believe is an "offer" of insurance may actually be the required disclosure and consent form you must sign, acknowledging that you and your heirs have no economic interest in the policy, and that you agree to cooperate in the underwriting process. If this is true, and you (or other employees) misunderstand the nature of the insurance, it could end up being a huge problem for the employer. "Informed consent" means exactly that, you have been informed and you understand, and agree with, the implications.
If, on the other hand, your employer is offering to pay the premium for a personal life insurance policy on your life, and you get to name your own beneficiary, then the premium for any amount of insurance in excess of $50,000 needs to be "imputed" to you for income tax purposes, otherwise the death benefit would be a taxable event when paid to your beneficiary. This is the same for any group life insurance benefit.
There is more to your situation that needs to be shared. We need a little more information to be able to give you better answers.
Posted: Fri May 07, 2010 12:51 pm Post Subject:
You're employer isn't really backing the policy, merely offering a benefit to you.
I've known some of the key employees in our organization also receiving such benefits. I guess they refer to it as a Keyman's insurance.
Posted: Fri May 07, 2010 02:17 pm Post Subject:
Not necessarily. "Key person" life provides compensation to the business in the event of the death of the employee, and they can use the money for any purpose. In a policy issued as a backstop for a deferred comp plan, the company/plan is the beneficiary, but the proceeds are used essentially to pay the employee's deferred comp benefit to the employee's beneficiary. In either case, the company does not get a deduction for the premiums paid for the insurance.
In a deferred comp plan, the company receives the life insurance death benefit without taxation, but the deferred comp money paid to the employee's beneficiary creates a taxable event as far as any "gain" is concerned (since no real money goes into a non-qualified deferred comp plan, everything paid = gain). Even when paid with the tax-free life insurance money.
Policies written for deferred comp plans are always cash value (usually UL or VUL). Many companies use the cash value (not in excess of cost basis) for other purposes, since they can reasonably expect not to have to pay 100% of the plan assets out at one time.
Posted: Sat May 08, 2010 11:56 am Post Subject:
I've often heard people saying that the employer-issued life plans are not good, since these plans are not aimed at satisfying their individual needs. Do you all support this view?
Posted: Sat May 08, 2010 01:21 pm Post Subject:
employer-issued life plans are not good
Completely disagree. Anything provided by one's employer, if the benefit will go to the insured person's beneficiary, is a positive thing.
Some employers provide $25,000-$50,000 of basic group term insurance. In many plans, employees can obtain additional (optional) coverage, perhaps up to 5x their annual income, at the group rate. This is favorable compared to most individual policies.
Problem is, when you leave the group, you lose the group insurance. You can convert to an individual plan, but it will be more expensive. Other individual insurance might be less expensive, but due to health issues you might not qualify, and would have to pay the higher premium to keep the coverage. But at least it would be available.
these plans are not aimed at satisfying their individual needs
Absolutely true. The employer usually provides the benefit (1) to attract some employees to the job, and (2) to assist in keeping those employee on the job and not out looking for work somewhere else. Does the employer intend for the benefit to be a person's only need? No way.
Does that mean it is supposed to be sufficient for that person's needs. Of course not. That's what "personal responsibility" is all about. If your beneficiary would need more than $50,000 (most workers do) following your death, then you need to get more coverage -- individually.
Posted: Sun May 01, 2011 06:08 pm Post Subject: group life insurance
what percentage of employees die while actively employed and collect on group life insurance
Posted: Mon May 02, 2011 05:59 am Post Subject:
ZERO percent of employees covered by group life insurance die AND collect a benefit. It is an impossibility.
Next question?
Posted: Wed Mar 14, 2012 08:35 pm Post Subject: what percentage of employers
what % of employers offer 100% free group basic life insurance?
Or what is the percentage of employers who dont pay 100% for basic group life insurance and employees contribute to it? :shock:
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