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The race is on. Thanks to the pandemic and “The Great Resignation,” employers are scurrying to find good employees before their competitors do. The demand for good workers is high, but the supply is low.
Jump ahead to these sections:
- What Is Employer-Provided Life Insurance?
- How Does Employer-Provided Life Insurance Work?
- Reasons Why Some Employers Offer Life Insurance
- What Types of Life Insurance Do Employers Typically Offer?
To attract new employees, many employers are offering flexible benefits like hybrid (work from home and at the office) and full-time work-from-home positions, flexible (work when you want) hours, and compressed work weeks (working 40 hours over four days).
While these newer benefits are trendy and very popular, traditional employee benefits such as health insurance, 401(k) plans, and paid time off are still very much in demand. But what about employer-provided life insurance? Do employees need it? Do they want it? Why do employers offer it? Let’s take a look.
What Is Employer-Provided Life Insurance?
Employer-provided life insurance (often called “group life insurance”) is an employee benefit usually offered with group medical, dental, and disability benefits. It is also considered a group benefit because the company or organization owns the group life policy, and employees are simply insured under it.
How Does Employer-Provided Life Insurance Work?
Employer-provided life insurance is very similar to individual life insurance in many ways. Like personal life insurance, employer-provided life insurance has three parties involved in a policy:
- The policy owner (the company)
- The insured (the employee)
- The beneficiary (selected by the employee)
Like an individual life insurance policy, when the insured employee dies under an employer-sponsored life insurance policy, their beneficiary(s) will receive the death benefit payout. Your group life agent can tell you how long it takes to get a life insurance payout.
With an employer-sponsored group life plan, the employer will typically pay the full cost of "basic life insurance," which is usually $50,000 of life insurance or up to five times the employee's compensation during the past rolling 12-month period. Any premium the employer pays for an employee's coverage over a face amount of $50,000 is considered taxable income for the employee by the Internal Revenue Service (IRS).
Employees usually can apply for life insurance in excess of the employer-provided amount if they choose to. You'll pay the full cost of this additional life insurance through payroll deduction. Some life insurers provide you with a life insurance calculator to help you decide how much life insurance you need.
One of the major advantages of group life insurance is that the basic life insurance face amount is guaranteed to be issued regardless of an employee's health history. Pre-existing medical conditions cannot result in an employee being denied life insurance. This is unlike individual life insurance, where life insurance companies will decline an applicant with certain pre-existing health conditions.
A significant disadvantage of group life insurance is that their group life insurance coverage will end when employees leave their job voluntarily or involuntarily. It isn't "portable" (you can't take it with you), and unlike group health insurance, there are no Cobra provisions whereby an employee can keep their coverage temporarily.
The downside of this non-portability for an employee is they may not be healthy enough to qualify if they apply for an individual life insurance policy. Losing their group coverage may leave their family in a precarious position, especially if that's all their life insurance.
Reasons Why Some Employers Offer Life Insurance
Some employers offer life insurance for their benefit and the benefit of their employees. Here are four reasons why.
To attract and retain employees
Today’s labor market is tight, and as Baby Boomers continue to retire, it’s expected to remain that way. So while a company must offer competitive pay, they also need a robust employee benefits package to attract new talent and keep what they have.
Employees not only expect health insurance and retirement plan benefits, but they also want group long-term disability insurance, group long-term care insurance, and group life insurance.
To enhance the financial security of their employees
Perhaps more than ever, employer-provided life insurance is very important to employees. According to LIMRA (Life Insurance Marketing and Research Association), primarily because of COVID-19, 27% of adults lost their life insurance coverage during the pandemic due to losing their job unexpectedly.
Because of this, LIMRA reports, half of the workers believe employer-provided life insurance is more critical now and a benefit they want from a new employer.
Workers rely on employer-sponsored life insurance
According to the 2021 Insurance Barometer Study by LIMRA, 57% of U.S. workers have life insurance through their employer, and 2/3 rely on group life insurance to meet all their life insurance needs.
More than 80% of workers in the U.S. are interested in group life insurance as an employee benefit, and 40% are “extremely interested.” Because of COVID, they are more keenly aware of their mortality, and those that lost their jobs and their life insurance don’t want to experience again the feelings of insecurity they had without it.
Generation X and Millennial workers and workers with children under 18 are the most interested in employer-sponsored life insurance.
Increases employee productivity and job satisfaction
If someone you know has experienced financial-related stress, they’ll tell you that it affected their job performance and productivity. They found it more challenging to concentrate on the task at hand and made more errors than before the stress set in. This eventually adversely affects customer satisfaction and the employer’s bottom line.
Having group life insurance and other employee benefits can help employees feel more secure and satisfied with their job and life, which translates to feeling better about themselves and their family’s security. In addition, workers who feel this way are apt to be more productive and produce higher profits for the company.
What Types of Life Insurance Do Employers Typically Offer?
Two types of life insurance employers typically offer as a group life benefit: term life insurance and whole life insurance. Let's look briefly at both.
Term life insurance: is the most popular type of life insurance with employers because it's the lowest price life insurance on the market. Employers who offer group medical insurance and provide matching contributions to the company's 401(k) plan usually feel the pain of the bite employee benefits are taking out of their budget.
However, the cost of group life insurance for employers is very low compared to what they pay for other employee benefits. Employers' premiums are tax-deductible, and employees are often comfortable and familiar with term life insurance products. Some employees will already own an individual term life insurance policy.
Term life insurance doesn't accumulate any cash value, unlike permanent life insurance policies like whole life insurance or universal life insurance. Term life strictly pays a death benefit to the policy's beneficiary if the insured dies while coverage is in force.
Premiums for employer-provided term life are usually "banded." This means that the rates are the same for all employees within a certain band, such as the band for people ages 30-34 or age 35-39. When an employee moves up to the next band, their premium will increase but remain level until they move to the next band five years later (though life insurers can raise rates for each band (not each employee) when the policy renews annually.
Whole life insurance: Some, but not many, employers provide group whole life insurance instead of group term life insurance. They do this for a couple of reasons.
First, they offer whole life insurance because it provides a death benefit and accumulates cash value. Employers like to see their employees not only protect their families if they die, but they also want to see employees be able to accumulate some cash value in their policy to use while they’re alive.
Employers also use group whole life insurance over term life because it’s considered a “Cadillac benefit” compared to term life insurance. Employees know that whole life is more fully-featured than term life and that their employer is paying more for it than they would have if they offered employees term life. This is an excellent employee attraction and retention tool for companies.
Pros & Cons for Employees of Getting Life Insurance Through Work
Any time they enroll in employer-sponsored group benefits plans, employees should consider the advantages and disadvantages of each benefit, including employer-provided life insurance coverage.
Pros of buying life insurance through work
Price: The basic coverage ($50,000 face amount or 5x the employee’s salary) is typically paid for 100% by the employer. It’s easy for an employee to get a relatively small amount of life insurance at no cost.
Convenience: Signing up for group coverage through work is simple. In under five minutes, employees can select how much coverage they want, name their beneficiaries, and complete their documents online. If they need help during enrollment, their HR department or manager can help.
Guaranteed approval: Group life insurance plans offer guaranteed acceptance for the base amount. An employee can have cancer, a heart condition, diabetes, etc., and will not be denied coverage. Employees do have to qualify medically for any amount of coverage they buy that exceeds the base amount.
Cons of employer-provided life insurance
Limited selection: Employer-provided group life insurance tends to be term life insurance, not whole life or universal life insurance; employees don’t have a choice. And, almost all employers will only provide term life insurance through one carrier. Employees who want a permanent life insurance policy, not term life, and want a different carrier than the one their employer uses will need to consult a financial advisor or life insurance agent for assistance.
Coverage is tied to the employer: Group life insurance is rarely portable, meaning you can’t take it with you when you leave your job. This means you’ll leave important life insurance behind, and you may not be insurable because of your health if you try to buy an individual policy to replace the group life you lost.
Small face amounts: Many group plans limit the amount of life insurance protection you can buy. This can prevent you from having the amount of life insurance you need in force to protect your family if you die adequately. It may also force you to buy more expensive individual life insurance, which you may or may not qualify for medically.
Is Employer-Provided Life Insurance Right for You?
If your employer is offering you free life insurance – take it. Why leave it on the table when it doesn’t cost you anything and provides cash for your family if you pass away while you work there?
However, do some comparison shopping for any life insurance over the basic amount. You may find the price from a low-cost term life insurer may be lower than what you can get at work. But, be sure that this low-price carrier has solid financial ratings from companies that rate insurers, like A.M. Best, Standard & Poor, and Moody’s.
