Benefits

Not Sexy, But Important: Look Again at Life Insurance

It isn’t the sexiest benefit on the menu, but life insurance might be the most heroic. Unfortunately, its value is often unappreciated until tragedy strikes.

In recent weeks it seems the world careens from one tragedy to the next, ranging from the most high-profile to the most personal. No matter which kind you and your employees experience, life insurance may bring a measure of comfort and financial security to those it protects.

We thought it appropriate to share a few key points for you to understand about your organization’s life insurance offerings—either company-paid or voluntary. Your thorough understanding of the need for life insurance and the real-life impact it can have on your employees will better position you to choose the right insurance products, and communicate them effectively.

Here are a few of the basics. You can always learn more through your benefits providers.

Taxes. Proceeds from a life insurance policy are generally not subject to income or inheritance taxes for the beneficiary. Employees can use the money for any purpose, without worrying about being hit with a tax bill at year-end. (These are general statements, and employees and their beneficiaries should seek qualified tax counsel for their particular circumstances.)

Because life insurance policies require a beneficiary designation, the proceeds are paid directly to the beneficiary, so they don’t go through the probate process. This can speed up the payout of funds, and ensures the money is distributed based on the insured’s direction.

Types. Term insurance and permanent (or whole life) insurance both pay out on an individual’s death. But term insurance is designed to buy the most coverage for the lowest premium. Coverage is for a specific term, such as 10 or 20 years. After the term has expired, coverage can sometimes be continued but premiums will increase. Term insurance can remain in effect until a claim is paid out or until the premium is not paid.

In addition to a death benefit, permanent insurance includes a cash value component. As the owner pays premiums, the policy builds cash value that is available to the owner during his or her lifetime, through withdrawals or loans. The face amount of the policy will usually be reduced by the amount withdrawn.

Upon death of the insured and payment of the face value to the beneficiary, the cash value is usually returned to the insurance company. Premiums for permanent insurance are higher than are those for term insurance.

Who.  Anyone with financial responsibilities should have life insurance. For young, single people without a family, the amount needed may be low. Proceeds can be used to pay off debts and cover burial costs. Those with dependents need more, because the money can use proceeds to replace lost income and fund future expenses, like college education for children.

The importance of life insurance for a family is easy to see. In a two-income household with young children, for example, the surviving spouse will still need to meet expenses when family income is suddenly cut in half. Life insurance proceeds can be used as a substitute source of income, to pay down the mortgage, or for another vital purpose.

If the family has a single wage earner, the money is equally important for both spouses. The need to replace the wage earner’s income is obvious. But the spouse who doesn’t earn money outside the home plays many roles in the household, and someone will need to fill them. There may be a need to pay for childcare and for other household chores.

Changes. Insurance needs should be examined periodically, and especially when life circumstances change. A marriage, birth, death, or other significant change may create a need for more (or possibly less) insurance. Periodic reviews can help employees stay on top of their current needs, thereby avoiding surprises during difficult times.

At work. Most Americans who have life insurance get it through the workplace. It’s great that you, as an employer, provide a basic amount. Often, the amount provided is equal to the employee’s annual salary; a good start, but generally not enough to provide a real safety net.

Many companies also provide access to voluntary coverage—paid for by the employee—during open enrollment. This is a good way to give employees access to the additional coverage they need at a time when they are thinking about benefits.

This additional voluntary life insurance coverage provides another benefit, as well: when purchased at the time and in the amount determined by the insurance company, it may be available without underwriting requirements, such as weight and health assessments. This can be valuable to an employee who may be unable to purchase more life insurance on his or her own, or who will be required to pay much more for it outside of the workplace.

Voluntary coverage, because it is paid by the employee, is also owned by the employee and therefore stays in force (as long as premiums are paid) even after he or she leaves the company. This is particularly beneficial, because when the life insurance policy is paid by the employer, the coverage is usually discontinued when the employee leaves, whether due to health, injury, a new job, or another reason.

Communicate its importance

We hope that you have gained some understanding of the value of life insurance, for yourself and for your employees. While you’re thinking about it, take a few minutes to let employees know why you feel it’s important.

Structure a communications campaign outlining some of these key points. Seek educational materials from the insurance company that provides your firm’s life insurance benefits. If you don’t offer voluntary coverage, bring in a local representative who can get it onto your benefits menu. When tragedy strikes, you will sleep easier knowing you provided some real help to an employee who needed it.