Providing life insurance for your employees is a major milestone towards creating a sense of legitimacy for your company’s image. There are three main steps to the process.
- Research into insurance bundles, payout formats, and the types of employees working at your firm.
- Ironing out the details of coverage for your employees.
- Finding the appropriate insurance vendors and implementing your life insurance policies for your employees.
Of course, there are some legal and financial particulars as well, but you’ll want to remember these three steps: Do your research, account for coverage, and find proper insurance vendors. Within each of these overarching parts, there are a number of smaller steps that will guide and structure the process.
For example, the research step may consist of a series of smaller steps such as distinguishing between the pros and cons of individual and group insurance policies, determining the most appropriate payout formats, and surveying your employees to identify if bundling certain individuals into a group insurance plan with a specific payout type makes sense.
Why Company Sponsored Life Insurance Matters
Before we further sketch out the major steps your company should take to acquire a robust and flexible life insurance package for its employees, you should understand why your company would want to offer life insurance in the first place.
The financial funding and logistics of getting a consistent set of life insurance plans for all your employees testify to the stability and the authority of the business. In a way, a company’s reputation is solidified by the feelings of consideration contained in the gesture of offering a life insurance policy to its employees, but that piece of reputation is not so readily earned; the process of picking out life insurance policies that have appropriate coverage for a diverse employee population is more technically demanding than it first seems.
Life insurance policies are privileges for employees because of their optional nature. A company does not have to offer you a life insurance policy to hire you as a full-time employee, so it’s an employment perk because the company is making extra expenditures and time investments to secure the appropriate policies for its employees. The Bureau of Labor Statistics reports that, on average, 58 percent of all private industry workers were offered life insurance by their employers; notably, three-fourths of full-time workers have access to employer-provided life insurance plans while the figure drops to 14 percent for part-time workers.
The numbers indicate the idea of life insurance as an important benefit associated with the legitimacy of a company since the vast majority of full-time employees have access to and accept the life insurance plans offered to them. Offering life insurance to acknowledge the commitment and value of your full-time employees arguably exists as a standard across most industries and businesses. So as your business grows, emulating these standards of professionalism become increasingly important for your reputation as a fair employer.
But as most business owners know, the growth phase for companies often manifests as a hectic and uncertain period. The four biggest things weighing on the minds of small business owners concern the growth and survival of their companies, and they include (1) growing revenue, (2) hiring new employees, (3) government regulations, and (4) cash flow. On top of the need to network, devoting additional financial, social, and legal resources to figure out a life insurance plan on your own can quickly become overwhelming.
Successfully getting life insurance for your employees is a painstaking process that follows a few major trends.
Primarily, you need to research the types of insurance packages and payouts that are available; the two most common types of benefit payments that make up 95 percent of all employer-provided life insurance plans are flat dollar amount formulas and fixed multiples of annual earnings formulas.Afterwards, you’ll need to consider a multitude of coverage issues that involve who gets covered and the how much coverage they receive. Finally, after sorting through coverage, you’ll need to contact the appropriate insurance vendors and implement an oversight process that ensures the smooth and organized implementation behind the introduction of life insurance plans.
Process and Parameters of Research
Company life insurance plans get complicated. When you’re just considering insurance for an individual’s perspective, you might just have to worry about the issues related to risk related to that individual and the format of the payout; when you plan insurance for different groups of people, the insurance deals become much more complex because of how aggregate risk around different groups of people are calculated.
As a simple example, companies frequently offer individual plans or basic and supplemental group life insurance plans with benefit payments utilizing the previously mentioned flat dollar amount formulas and fixed multiple of annual earnings formulas.
Individual and Group-Based Life Insurance Distinctions
Basic group life insurance is completely paid for and provided by the company and, like its name implies, covers a group of people for about 1 or 2 times their salary. Meanwhile, supplemental group life insurance is usually offered alongside basic group life insurance.
The premise of supplemental group life insurance is to offer individual employees options to upgrade their insurance plans to suit their personal circumstances and needs more closely; the employee pays the corresponding premiums for this extra coverage in this case. Basic group life insurance is like the manufacturer’s warranty, while the supplemental group life insurances are like the 3 or 5 year insurance upgrades you see for many electronic products.
From the perspective of the employee, they can either opt to be a part of an individual insurance plan or a group plan by the company; however, from the company’s perspective, they will want to reach an insurance arrangement that saves their company the most money. So part of this research process involves identifying people that you can group together and that are likely to stay with the company for a longer time.
How to Make Employee Benefit Calculations For Insurance Plans
The more basic of the two most common formulas is the flat rate formula, which just provides a set amount of benefits that has no relationship to the employee’s salary or position. Another report by the Bureau of Labor Statistics detailing insurance calculations for medium to large private establishments remarks that: “Insurance amounts ranging from $5,000 to $25,000 are common in such plans.” It’s a relatively straightforward plan for benefits that can help insure a large group of employees choose to remain in entry-level positions (think customer service representatives) over an extended period of time.
Variable benefit insurance plans constitute the other insurance benefit payout format that is also very popular. These plans are usually pegged to some multiple of an employee’s salary, which allows the insurance of that employee to scale as they are promoted in the company. These variable benefit payouts are the most appropriate for groups of people in your company that you believe you to have a high degree of economic mobility because it will help reduce the frequency of insurance plan adjustments that need to be made if the benefits scale with salary boosts.
In both the case of fixed and variable benefit payment plans for insurance, a few other variables can be factored into and applied to the insurance calculation of payouts such as the length of employment. There are also a wide set of payment structures that your business can consider as well to simplify how benefit plans are distributed across a population of employees.
One such payment structure is the “multiple varies by earnings” formula. Under this provisioning format, you might have people who earn less than $30,000 receive a benefit of 1 times their salary. Meanwhile, employees earning more than $30,000 would receive a benefit of 2 times their salary, making the benefit structure follow a tiering pattern where those who are paid more have proportionally greater insurance benefits due to their increased importance to the company (we’re assuming salary is a big indicator of your value to the company in this case).
Designing an Employee Survey to Figure Group Insurance
With our knowledge of both the different types of group insurance along with the function of fix and variable benefit payment rates, it is possible to complete our research step by conducting a survey for our employees regarding life insurance policies in the company. As mentioned before, you’ll want to identify groups of people along the axis of factors such as economic mobility and inquire into if they are interested in supplemental group insurance.
Formatting your survey should be relatively simple as a large amount of templates for company insurance surveys geared towards employees are accessible via a simple Google search. You can further check out the set of graphs in this report by Full Spectrum Benefits on life insurance to get a better sense of what type of results you are looking for when performing this internal survey. Consider some of these targeted survey questions on insurance preferences:
- Do you offer basic life insurance?
- Who pays for the life insurance?
- What is the level of coverage available?
- What percentage of the premium does the employee pay?
- Do you offer employee supplemental life insurance (additional coverage to the core life insurance coverage)?
- What is the maximum level of coverage available?
The data that you gather from an employee survey should lean towards mimicking the same result format as this Full Spectrum Benefit report, with the idea of using these specifics to optimize your insurance planning.
To give you an idea of why surveys are a vital part of setting up life insurance for your employees, consider a scenario where you have a report that 80 percent of your employees work for around $25,000 a year while the other 20 percent work for $50,000 or more. The former group indicated in the survey results that they want a lot of supplemental group life insurance options while the latter has no preference.
So, based on these results you can refine the format of your insurance to utilize flat-rate calculations with more than one supplemental group coverage option for the group making around $25,000 since they’ve indicated their preference for supplemental group life insurance and since flat-rate benefits may be too rigid.
Perhaps someone making less than $25,000 feels as if the basic group life insurance does not give his family enough security, so having access to two or three tiers of supplemental group life insurance may help ease the anxieties of your employees who feel this way. Let’s call an insurance plan from this category Plan A.
On the other hand, the other 20 percent of your company should get a variable, salary-based group insurance plan. Offering another supplemental life insurance plan just so the choice is available is not a bad idea in this case. You may also choose to include insurance deals that give increased multiples of your employees’ salaries as they earn higher salaries for this category. Let’s call these insurance plans Plan B.
Profiles: Matching Employees With Research
Using your research, you can now match employees based on their family information and other personal data to either Plan A or Plan B. We can look at some sample profiles to illustrate this point how matching might work from a human resources perspective.
Suppose Ryan is supporting a family of five with his $25,000 salary along with his wife’s $50,000 salary. Ryan’s supplemental life insurance plans at his company are more affordable and allow him to cover his family better, so he decides to go with the more expensive premium associated with a better supplemental insurance plan.
On the other hand, Paul is another employee in the company. But Paul’s in a high ranking executive position despite being still relatively young and he has no dependents, so he opts for the basic life insurance plan that corresponds to his salary.
Anticipating these types of employee profiles can help you diagnose the reaction your workforce will have to these new insurance options. In fact, surveying employees for things like marital status, length of service, and their role in the company will immensely assist and simplify the handling of coverage in your organization.
Ensuring Proper Coverage
Research is probably the most involved of the the major three steps to getting insurance here. Once you have a good grasp of the basic life insurance policies that you wish to enact for your employees that corresponds to their needs, you’ll need to worry about a number of practical and legal implications associated with the provisioning of that insurance. Coverage concerns the navigation of those legal requirements when you are drafting your group-based life insurance plans.
The most prominent coverage issue that one should consider are the set of nondiscrimination requirements that your company needs to abide by when offering group life insurance; not following these requirements may land your organization in hot water. So, what conditions determine if a company is offering life insurance to its employees on a fair basis?
- The plan must benefit at least 70 percent of the employees
- At least 85 percent of the employees must not be key employees
- The plan benefits employees classified under a group by their employer and found by the IRS to be nondiscriminatory.
As we can see here, a general guideline to follow when accounting for the coverage of your employees is to not bias that coverage in favor of a certain group of employees. When you offer life insurance to your employees, it needs to favor inclusivity over insularity. Nondiscrimination requirements are a coverage consideration that’s enforced so that companies don’t limit their life insurance plans as part of a financial strategy to cut costs.
Specifics Pertaining to Taxation and Different Groups of People
Distinctions exist based on the taxes applied to different types of people that are on a group life insurance plan. Because of these distinctions, your business needs to account for several life-related and employment-related factors in the process of fine tuning the coverage your insurance plans offer. This is where the results of the surveys that you’ve performed during your research phase come into play.
For group-based life insurance plans, classifying groups of people based on their marital status, job duties, compensation, length of service, and participation in economic bonuses like stock plan or pension greatly reduces the confusion related to keeping taxation records straight when it comes to providing life insurance for these employees. As long as the nondiscriminatory requirements are also followed, creating group-based life insurance plans based on the above subgroups should not present an issue.
However, tax calculation when it comes to the coverage that your company provides becomes trickier when the value of the life insurance plan increases since the government will begin to tax your employees (and your company through payroll taxes) in a way that corresponds to the value of the insurance premiums.
The magic number that you want to watch out for when it comes to tax considerations is $50,000, since any group-term life insurance policy receives no tax consequences if the total value of that policy does not exceed $50,000. Beyond that value, things will start to get hairy since you’ll now have to think about how to optimize between giving your employees life insurance while also accounting for the value of taxes as a result of the value of that insurance policy.
According to the regulations imposed by the IRS on group-term life insurance: “A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer.” Employers, whether they pay for the group-term life insurance in full or have their employees subsidize a part of the insurance premium, must calculate taxes on the dollar amount in excess of $50,000.
Consider Coverage Options Outside Group-Life Term Insurance
When it comes to life insurance for your employees, you should also consider a number of other insurance schemes outside of group-life term insurance because there are a specific set of common accidents that your employees may encounter during their job. A report by Bizfilings lucidly summarizes these alternative coverage types, I’ve included their explanations below for your consideration.
- Group accidental death and dismemberment. Commonly known in the industry as “AD&D,” this coverage pays benefits to the employee’s beneficiary if death occurs due to an accident or if the employee loses use of portions of the body (loss of one arm and leg, for example, may result in payment of a percentage of the total benefits).
- Business travel accident insurance. This insurance covers only a narrow occurrence — the death of the employee while traveling on business. If your employees don’t travel or don’t travel much, this may not be worth your money.
- Split-dollar life insurance. This insurance pays the employee’s beneficiary when the employee dies and returns the premiums paid to the employer. The insurance is paid by both the employer and employee and has a substantial investment element to it. It is something to consider for key employees only, as opposed to your entire employee group.
So, the key takeaways of the coverage section are (1) to make sure that your group-based life insurance plans are nondiscriminatory especially with regard to key employees, (2) to consider the demographics of the people in your company receiving insurance so that you can organize their coverage more easily, (3) be cognizant of the $50,000 limit on group-term life insurance, and (4) be aware of other coverage options outside group-term life insurance that may better apply to your employees or give more value.
These takeaways should guide your decisions on who to offer insurance for and the value of their insurance benefits.
Finding An Insurance Vendor
The process of finding an insurance vendor is similar to the process that you’ve used to perform research on the best insurance fit for the employees of your company. You’ll want to start with a survey and harness the power of the social network around you including your friends, family, neighbors, other small businesses, or even your customers to fill in the details. Design a simple survey that people can complete in a few minutes with some questions like:
- What company provides insurance for you?
- What kind of plan are you on?
- Do you know what type of insurance you have (group-term, split dollar, etc.)?
- What is the payout structure of your insurance benefits?
Do a quick online background sweep of the most frequently mentioned insurance providers. Finally, together with the research you’ve performed on company life insurance and the types of employees at your company, you will be able to present a detailed and extensive life insurance plan to prospective insurance companies and make it much easier for them create and offer you plans that satisfy the needs of your business.