Employee Benefits

Different Types of Group Life Insurance

There are five major types of life insurance to consider:

Term Insurance. This is the type of life insurance you will most likely offer your employees. Term Life provides protection for a specified period--in the case of group life insurance for employees, the "term" is most likely the duration of the person's employment with you. If the employee leaves his or her job, the employee has 31 days to convert the policy to a permanent contract with no health questions. Term insurance pays a death benefit to a beneficiary or beneficiaries, but does not have a savings or investment component.

Whole Life Insurance. This type of life insurance provides permanent protection for a person's entire life, provided the premiums are paid. The death benefits and premiums associated with a whole-life policy remain fixed. Whole-life policies also accumulate cash value on a tax-deferred basis. This cash can be borrowed against by the policyholder, but policy loans do accrue interest as well as reduce the death benefit and cash value of the policy.

Universal Life Insurance. This type of life insurance combines a death benefit with a savings component. Premiums (both amount and payment frequency) and death benefits are flexible. However, if the insured adjusts the premiums and benefits in such a way that the death benefit and contract expenses are no longer covered by the savings interest and premiums, the policy can lapse. Today some companies offer a guaranteed death benefit policy for a fixed price. This type of policy is generally more expensive than whole life.

Variable Life Insurance. This kind of insurance provides permanent protection for the insured's entire life, with a fixed premium. It also functions as an investment vehicle, because it allows the policyholder to allocate a portion of the premium dollars to a separate investment account. This account offers several investment options in the insurance company's portfolio. The policyholder decides how to invest the cash value of the policy. How the investments perform will affect the death benefit beneficiaries receive, but the benefits will not drop below the original face amount of the policy. Generally this type of life insurance policy is more expensive because of the investment option.

Variable Universal Life. This is similar to Universal Life, in that the premiums and death benefit amounts can be adjusted by the policyholder. It also combines the advantages of a variable life policy by accruing tax-deferred cash value that can be invested by the policyholder in his or her choice of investment vehicles. The policy's accrued cash value can be used to pay premiums. The cash value and death benefit of the policy is affected by the investment decisions made by the policyholder, and minimum cash value isn't guaranteed. A minimum death benefit is guaranteed, but must be funded by premium payments. If investments perform poorly, the policyholder may have to pay higher premiums.

Most employers choose Group Term Life Insurance as the type to include in their employee benefits package. The "term" of the insurance is the time the employee works for you. If an employee leaves your company, the coverage lapses. Many policies give the departing employee the option to convert the group term policy to an individual term policy, although the insurance will likely cost more because it loses the economies provided by the group.

In order to be eligible for Group Term Life Insurance, you must have at least two employees. If your company is small, you will most likely offer a set death benefit, such as $10,000 or $20,000. If your company is larger, you might decide to offer death benefits based on an employee's salary.

As your business grows and you hire more people, the size of your "group" gets bigger. That means the per-employee cost of life insurance will go down, and you may be able to increase the death benefit. As your company grows, you may also become eligible for more options on your term life insurance plan, such as dependent coverage.

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