The Ultimate Employer’s Guide to Life Insurance
When it comes to building a comprehensive benefits programme for your team, life insurance is probably at the top of your list. But it can seem like a complex product to understand, making choosing the right plan and provider tricky.
In this guide, we’ll break down exactly how life insurance works, what employers should offer, and how much it costs. So if you’re looking to find the perfect life insurance fit for your benefits offerings, read on.
What is life insurance?
Life insurance is a type of insurance policy that protects the policyholder’s loved ones if the insured passes away. In exchange for premiums paid by the policyholder, life insurance provides a payout to the policyholder’s beneficiaries in the form of a tax-free lump sum payment.
The beneficiary (the person who receives the funds from the policy when it’s claimed) can be anyone the policyholder chooses–most commonly, this is a spouse, children, or a charity.
Though life insurance is sometimes referred to as ‘life assurance’, it’s important to note that life assurance is a specific type of life insurance (more on that below).
For employers, life insurance is one of the four ‘core benefits’ you can provide for your employees, along with private medical insurance, group income protection, and pension benefits.
How does life insurance work?
Life insurance is meant to serve as a financial safety net for the policyholder’s dependents. It works by paying out a ‘death benefit’ to the policyholder’s chosen beneficiaries. This payout is tax-free and is paid in one lump sum.
While this payout can’t make up for the loss of a loved one, it can be immensely helpful in ensuring that the beneficiaries are able to maintain their quality of life and take care of any expenses, like:
- Final expenses
- Mortgage payments
- Children’s education costs
- Pay off outstanding debts
- Handling estate taxes
- Every day living expenses
What does life insurance cover?
Unlike other types of insurance, life insurance is very likely to pay out, since death is straightforward to prove. Because of this, life insurance typically covers most causes of death, including critical illnesses and diseases, automobile accidents, natural death due to old age, and more.
In fact, there are very few causes of death that life insurance won’t cover. With that said, the insured should read their policy carefully to ensure there are minimal exclusions, which we’ll walk through below.
What does life insurance not cover?
Though life insurance is extremely likely to pay out, there are a few instances where it might not. Here are a few reasons a claim on a life insurance policy may be denied.
1. Inaccurate information on your application
It can be tempting to lie on a life insurance application to get a more affordable rate, but consider how that can impact your policy. If you misrepresent yourself on your application, you may lose coverage.
For example, if you’re an occasional smoker at the time of your application but state while applying that you don’t smoke, a claim on your policy may be denied—especially if you were to pass from a smoking-related condition.
With that said, this is less of a concern with group life insurance, since employees are not underwritten individually—usually when a life insurance company determines the risk level of an applicant (‘underwriting’), that applicant is individually assessed based on different criteria such as age, gender, and health. These can all affect the cost of the policy or whether someone is able to get coverage, so it can be tempting to fudge the details.
With group life insurance, however, the group is underwritten—or risk-assessed—as a whole, so policyholders aren’t able to misrepresent themselves. So it’s much less likely that a claim would be denied on this basis.
2. Suicide within the first two years
It’s a common misconception that life insurance won’t cover death by suicide. While most policies actually do cover this, they don’t usually provide that coverage until two years into the policy. This is to mitigate against the risk of a person taking out a policy and then choosing to end their life with the purpose of giving their loved ones a payout.
Many group life insurance policies, however, will pay out for death by suicide without the two year waiting period—so always make sure to read policy terms carefully!
3. Policy lapsed
Life insurance is only active for as long as the policy is, so if the policyholder passes away after the policy is inactive, it won’t pay out.
For group life insurance policies, the policy lapses when the employee leaves the company, or the ‘group’—so if they were to pass away shortly after leaving their job, they would no longer be covered by group life insurance.
For individual life insurance, the policy may lapse if they miss too many payments, and a claim on their policy may be denied.
4. Exclusions in your policy
There may be other causes of death that life insurance won’t cover, so it’s important for the insured to read their contract very carefully. These are called ‘exclusion clauses’, which could include:
- Death caused by illegal activities.
- Death caused by war or terrorism
- Homicide by the beneficiary.
Types of life insurance
Life insurance can be a complex product to wrap your head around, but simply put, there are three main types: term life insurance, group life insurance, and permanent life insurance. Let’s walk through the basics.
Term life insurance
Term life insurance is a type of life insurance that lasts for an agreed upon length of time—usually 10, 20, or 30 years. It pays out if you pass away while the policy is active, within this window of time, or ‘term’.
Typically with term life insurance, your rates stay the same throughout your term length. Once it expires, if you choose to apply for a new policy, it may cost more due to changed health and age, and thus increased risk.
This type of life insurance is best for the average person looking for an individual policy, as most people only need coverage for a specific period of their lives (such as when they have a mortgage or their children are still dependent on them). It’s also a more affordable option than other types of individual life insurance policies, making getting coverage less of a financial barrier.
There are three main types of term life insurance:
Term life insurance
Term life insurance provides coverage for a specified term. If the insured person passes away during the term, the death benefit is paid out to the beneficiaries. This type of insurance does not have a cash value component and is typically more affordable than permanent life insurance.
Decreasing term life insurance
Decreasing term life insurance is a type of term life insurance where the death benefit decreases over the policy's term. It is often used to cover specific financial obligations, such as a mortgage or a loan, where the amount owed decreases over time. Premiums usually remain fixed throughout the term.
Renewable term life insurance
Renewable term life insurance allows the policyholder to renew the coverage at the end of the initial term without the need for a medical examination. While premiums for the renewed term are typically higher due to the increased age of the insured, this option provides flexibility for individuals who want to extend their coverage beyond the original term and would otherwise be denied for a brand new policy.
Group life insurance
Group life insurance is a type of term life insurance that an employer offers to their employees. Since it falls under the ‘term’ category, it does not provide a cash value, and covers the policyholder for a specified period of time, such as one year with annually renewable coverage. Group life insurance covers the insured for as long as they work with their current company.
In most cases, the employer pays part or all of the premiums for group life insurance as part of the employee benefits package.
Like all types of life insurance, if the insured individual covered by the group policy dies while the coverage is in force, a death benefit is paid out to the beneficiary (or beneficiaries) designated by the employee. This benefit is often a multiple of the employee's salary—a common example being twice their yearly salary.
Group life insurance uses a simplified underwriting process. This means that individuals covered by the group policy may not need to undergo a medical examination or provide detailed health information when enrolling in the coverage—instead, the group is underwritten as a whole.
The group structure allows for certain advantages, such as lower premiums due to the spreading of risk among a larger pool of participants.
Searching for the right group life insurance for your team? Explore our employee benefits catalogue to find the perfect match.
Permanent life insurance
Permanent life insurance is a type of life insurance that lasts the policyholder’s entire life. Permanent life insurance is also known as ‘life assurance’.
It’s typically more expensive than term life insurance since the insured is more likely to pass away while the policy is active, as well as permanent life insurance containing a cash value component.
As with term life insurance, there are a few different types of permanent life insurance to consider, including:
Whole Life Insurance
Whole life insurance is a type of permanent life insurance that provides coverage for the entire lifetime of the insured. It includes a death benefit and a cash value component. Premiums are typically level and remain constant throughout the policyholder's life.
Universal Life Insurance
Universal life insurance is a flexible permanent life insurance policy that allows policyholders to adjust the premiums and death benefits. It consists of a death benefit, a savings component (also known as ‘cash value’), and the flexibility to adjust the premium payments and death benefits within certain limits.
Indexed Universal Life Insurance
Indexed universal life insurance is a type of universal life insurance. It ties the cash value accumulation to the performance of a stock market index, allowing for the potential to earn higher interest rates than traditional universal life policies. However, there is usually a minimum guaranteed interest rate to protect against market downturns.
Variable Universal Life Insurance
Variable universal life insurance combines features of both universal life insurance and variable life insurance. Policyholders have the flexibility to adjust premiums and death benefits, and they can also allocate the cash value among various investment options such as stocks and bonds. The cash value and death benefit can fluctuate based on the performance of the selected investments.
How much does life insurance cost?
When considering adding life insurance to their benefits plan, employers are often under the impression that it’s an expensive benefit to provide. But really, life insurance is one of the most affordable benefits to set up, costing as little as 0.2% to 0.5% of payroll.
But for employees who might be considering an additional supplemental policy, monthly premiums are determined by many factors, including:
Age: The younger you are, the lower your price will be, since your risk of passing away is much less likely. As you age this price jumps accordingly, as your health is more likely to decline.
Gender: Men typically pay more than women, as women tend to live longer, by about seven years. So two applicants of identical health and age will pay a different price on the basis of their gender, with men usually paying more.
Medical history: Pre-existing conditions like diabetes, high blood pressure, and cancer can affect the cost of your premium (or in some cases, if you can get coverage at all).
Coverage amount: The coverage amount you decide on can impact the cost of your monthly premiums—the larger the coverage amount, the more you will pay.
Type of insurance: Term life insurance, since it’s only active for an agreed upon length of time and doesn’t accumulate a cash value, is less expensive than permanent life insurance, which can cost between seven to ten times more.
Lifestyle risk: If you have a dangerous occupation (ie. miner, roofer) or risky hobbies (ie. skydiving, surfing), this could impact your premiums as you’re more at risk than the average person.
What level of life insurance coverage should employers offer?
Employers typically offer one to two times an employee’s salary, with the option for employees to flex up coverage. Flex up coverage can be as high as seven to ten times the employee’s salary.
Some employees may choose to top up their coverage with an additional individual policy as well, as group life insurance policies can provide a smaller payout than the employee thinks their family might need.
Curious what companies around the world offer for life insurance coverage? Learn more in our country guides.
Why employers should offer life insurance as a benefit
Life insurance gives your employees peace of mind to know that their loved ones will be taken care of in the worst case scenario–and that’s no small consideration when talent is considering applying to roles with your company, or choosing to stay.
In fact, with more and more prospective employees viewing benefits as more important than their salary, including life insurance is essential in building a comprehensive benefits package that attracts and retains talent.
This is partially because life insurance can be pricey for employees to get outside of work. According to the Insurance Barometer Study from Life Happens and LIMRA, 49% of people who don’t have life insurance say the reason why they don’t have coverage is because life insurance is too expensive—so introducing this as a benefit can eliminate that barrier for your employees.
Curious how your company’s employee benefits stack up to other employers’ offerings? Use our benefits benchmarking tool to see how you compare.
Conclusion
Life insurance is a simple and affordable benefit employers can offer their teams that gives employees peace of mind. With group life insurance, employees are rated as a group, meaning less expensive rates than if they were to apply individually. And for employers, having this core benefit can mean attracting and retaining talent that expects to see life insurance in their offerings. All in all, life insurance is a must-have when building the best benefits package for your team.