Buying Group Life Insurance for Your Small Business

When you founded your small business, you likely started with one employee: You. But as you’ve grown, you may have realized that in order to attract and retain top-notch employees, it pays to offer a variety of benefits, which may include group life insurance.Many experts say group life insurance is a good supplement to a person’s existing individual life insurance. “Group life is fairly inexpensive compared to what an employer would pay for a medical or retirement plan,” says Larry Dinkler, director of e-business for group benefits at Hartford Life Insurance Co. “It gives you pretty good bang for your buck.”

Group life may be cheap, but there are numerous considerations before you buy it for your employees. Here’s how to untangle the complex web of group life insurance.

Where to begin

Group life insurance is usually offered as part of a “menu” of employee benefits, such as group health, group life, or group long-term and short-term disability insurance. Some employers automatically will issue group life insurance. Other employers may be willing to pay only a certain amount of money for benefits, and employees will be able to choose which benefits they receive.

A business with as few as two employees may offer a group life insurance plan. But, generally, employers don’t offer group life insurance as part of a benefits package until they grow to at least 10 to 15 employees, according to Ann Bryan, vice president of group insurance for Aetna U.S. Healthcare.

Bryan says most businesses with less than 1,000 employees usually opt to purchase group life insurance through an independent broker who can recommend coverage and provide prices from several companies. A broker can find the best policy for the best price by showing the employer a number of different insurers — similar to the way an independent insurance agent shops for individual customers. Most employers purchase all of their group insurance products — including health, life, and disability insurance — through one broker. “Employers will be looking for someone to assist them, compare rates, and understand products,” Bryan says. “Small businesses don’t have that expertise.”

An employer will pay a set amount per $1,000 worth of group life coverage. For example, every month a food-processing plant may pay 25 cents for each $1,000 worth of coverage on an employee. So if an employee has a group life policy with a $30,000 death benefit, it would cost the company $7.50 monthly for that employee ($0.25 x 30 = $7.50).

What to offer your employees

For starters, most employers that provide group life insurance as an employee benefit offer coverage worth anywhere from $10,000 to one year’s salary. These small policies are offered on a guaranteed issue basis, meaning no medical exam is required from any of the employees who will be insured. Many experts say that most people should view group life insurance as a supplement to existing individual life insurance coverage, as one year’s salary is generally not enough to support an employee’s dependents.

Since a medical exam is not required for guaranteed issue policies, the price a small business will pay for group life insurance will be determined mostly by: the number of employees; the average age of those employees; their gender; and the type of business you operate. Also, the risks involved in your business will determine how much you pay for group life insurance. For example, Bryan says an explosives manufacturing company would pay much more per $1,000 worth of group life coverage than a law firm or software development company.

And even if only one employee suffers from a severe medical condition (such as HIV, cancer, or diabetes), the condition does not affect the group’s rate as long as the person is actively working. However, employees who are out on disability, on maternity leave, or those who have taken a leave of absence, generally are not eligible for group life insurance until they return to work. With most group life policies, an employee still is covered when he or she takes a leave of absence because of a medical condition that occurs after the policy has been issued.

When to examine your group life plan

Just as an individual’s life insurance needs change, so do the needs of the employer. As your business grows, it’s only natural to re-evaluate the kinds of benefits you’re offering. Russell Ferguson, assistant vice president of Marsh Advantage America, the business insurance brokerage, says that an employer may want to reassess its group life insurance needs when it grows significantly larger, hires executives with higher salaries, or improves benefits in order to attract and retain employees.

Even if small businesses don’t need to change group life offerings, it pays to re-evaluate, Ferguson says. If the number of employees or the demographics of the employee population — such as age or gender — change significantly, it’s smart to notify the broker to see if you qualify for a lower premium.

While the most basic group life plan may be worth one year’s salary, an employer also could opt for expanded group life insurance. These benefits generally include two or three times an employee’s annual salary, or adding a “portability” feature, under which the employees can continue coverage after they leave or retire. Some employers also may offer a group universal life insurance policy, which builds cash value that can be used toward paying future premiums. However, employers with 1,000 or more employees usually only offer group universal policies because they are a “monster” to administer, says Dinkler of Hartford Life. That’s because employees’ cash value accounts must be individually managed, and employees are allowed to pay in as much as they want.

Employers also may look to buy separate group life insurance policies for different classifications of employees. For example, Dinkler says a plastics manufacturer may offer a flat $25,000 death benefit to the workers on the shop floor, while company managers receive benefits equal to one to three times their salaries.

Some group life plans also extend coverage to spouses and children. For example, an employer may offer a one-year salary life insurance policy on an employee, $10,000 on his or her spouse, and $5,000 on each child, with no medical exams required.

Smaller employers usually don’t offer such tiered policies, simply because they can’t afford them. Insurance companies offer better rates for larger employers because they are collecting more in premiums and the risk of any person dying among the group is lower. “Generally, a bigger group will get you better purchasing power,” Bryan says.

As employers begin to offer expanded benefits, they generally start to pass the expense directly to the employees. For example, an employee may receive a guaranteed issue group life policy, paid for by the business, that pays one year’s salary. But if that employee wants a policy for two or three times annual salary, he or she will have to pay for it directly. For expanded benefits, employees also will be required to take a medical exam, which includes revealing whether they are a smoker or nonsmoker, and submitting blood and urine samples. Ferguson says larger companies tend to pay for coverage extended to spouses or children, while smaller companies tend to pass the extra cost on to employees.

What to look for in a group life insurer

Financial strength. An insurance company’s financial status is the best indicator of its ability to pay claims.

Who they insure. Does the insurance company focus on small businesses with fewer than 101 employees, or does it tend to insure businesses with 500 employees or more? The answer is a good indication of their expertise with a company of your size.

Product features. If you’re offering voluntary group life insurance (part of which is paid by the employees), it is wise to look at insurers that offer such features as: portability of the policy, which allows employees to continue coverage after they have left the job or retired; accelerated death benefits, which pay out money from the death benefit to the employees if they become sick or disabled; or waiver of premium benefits, which allow employees to skip premium payments for a certain period of time when they are sick or disabled.

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Please note that this description/explanation is intended only as a guideline.

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