Hi everyone, as most of you probably know, this month is life insurance awareness month, so I wanted to take an opportunity to touch on the different types of life insurance and how we see them applied most commonly in our business. We do have some more extensive articles and some videos we’ve done on life insurance in the past as well. I have links for all those articles and videos below.
As always, if you have any questions or would like to dive in a little deeper on how life insurance could potentially help your executive team or business, please let us know.
First, I’ll briefly discuss the different types of life insurance and health insurance for companies that we see used most in the benefits space, then discuss the application of some of these types of life insurance.
Term Life Insurance
When you see the word term, that means the life insurance is in place for a set amount of time. The alternative would be whole (aka permanent) life which we’ll discuss later. With term life insurance, most people are most familiar with an employer paid life/AD&D policy. In this instance, the term is tied to the policy and the employee’s employment with the company as a full-time, benefits eligible individual. As long as the company decides to keep the policy in place and the employee stays full-time and benefits eligible, employees typically automatically get this life insurance provided to them on their behalf. Most commonly, we see this paid for by the company and the amounts are usually $50k or less.
In the individual market, people are probably most used to seeing 10, 20 or 30 year term policies. This means simply that once you have your firm offer, you pay your premiums for that set amount of time. If something happens to the policy holder and they pass during the term period (the 10, 20 or 30 years) then the benefit would be paid to whoever the policy holder had listed as their beneficiary. If the person outlives the policy, then it goes away. Some policies will have provisions where you can continue them at a higher premium or even convert them to whole life policies but that will vary depending on the vendor you are working with and possible riders that were added on when the policy was initially purchased.
So now that we’ve talked about term life and how it works, let’s talk about the application of them and how we see them used most often in the group space, of which, there’s really 3 areas we see these most often.
- Partner/Key Executive Life Insurance – These types of policies are most commonly put in place to help offset debt or investments a company has taken on. Oftentimes, the institution making the loan, selling the franchise, etc. will want a life insurance policy to be put in place at the expense of the business that would offset any investments or loans made, in the event one of the partners or key executives passes away. We also see this strategy employed quite a bit simply by businesses to help protect themselves from the loss of an owner or key executive. Someone passes away that has this type of policy in place, the result is the company (or whoever the beneficiary is) gets the life insurance payout and uses that to help replace the individual, offset the loan, etc.
- Employer Paid Life/AD&D – This is probably the most common type of life insurance we see. As mentioned above, this is mostly paid for by the company and is a smaller amount, usually under $50K and is simply tied to the person’s employment. As long as they work there and are full-time, the employee gets the benefit. From an employer standpoint, if you look around at your population, how many employees on your team do you think have no life insurance? That percentage of the total population is unfortunately usually high. These small but very affordable policies help give some financial protection to an employee’s family in the event something did happen to someone.
- Like the above, most employers will offer a voluntary Life/AD&D option that is also a term, and that is simply because it’s tied to the employee working for the employer. These voluntary buy up life options are usually offered alongside the employer paid policy and give employees the opportunity to buy additional life insurance at a very affordable price point and usually with little to no underwriting. When an employee is first eligible, there is normally a guaranteed issue provision which allows employees to buy a certain amount of life insurance with no underwriting at all. For anyone who has medical issues or family histories of different things that prevent them from being able to secure affordable individual life insurance, these guarantee issue provisions can be very helpful.
Whole Life Insurance
Now let’s talk about whole life. It is always going to be a more expensive policy to purchase, in the group or individual market BUT that is because the policy by design lasts much longer. You are not purchasing protection for a finite amount of time. These policies are considered whole life and most will go to age 100 or 110. This is why they are considerably more expensive in most cases.
With this type of policy, the insurance provider is pretty much guaranteed to be paying a claim at some point, where in the term life insurance world, that’s not always the case. There are many different versions of “whole” life, some allow for extra investments, so they build up extra cash value, some have variable rates and returns based on the market, etc. The main thing I will recommend when looking at this type of policy is to know exactly what you are trying to accomplish with this type of policy and then find one that suits your needs the most.
Like with most things in life, you can add all the bells and whistles imaginable to one of these types of policies and they can end up being SUPER unaffordable, or you can tailor one to you / your company’s needs and have the price point, much, much lower. Tailor it to suit your needs, not the needs of the person or company selling you the policy. And, if you are considering this type of program, be sure you are looking at multiple insurance companies and / or using a broker that has access to more than just one insurance provider. I’ve seen SOOO many times where there’s an independent agent who is aggressively trying to sell a whole life policy but then when we shop it in the wholesale distributor market, there’s countless other options available at better pricing and without the high pressure, aggressive sales guy. 😊
Just like we did with the above, I’ll talk through a few of the applications we see in the business world of these types of whole life insurance policies.
- The most common would again be keyman individual life policies but in this instance, the application is a little bit different. When we see employers offering these, it is usually as an incentive to get employees to come onboard or STAY onboard. Often referred to as golden handcuffs, a lot of times and employer will give a key employee access to the cash value on one of these while it is in force sometimes immediately or sometimes after a vesting period and would also very commonly “gift” the entire policy, cash value and all to the employee after they have been with the company for a certain amount of time. Only provision is that the employee stays with the company.
- Whole life policies sold at the individual employee level – there are several vendors in the group space who will also sell voluntary add’l life policies but structure them as whole life instead of term. This is beneficial for employees who want to buy a policy knowing that they have the option of keeping it forever. This can be great for employees, younger and older alike, who really want to lock something in now at their current age and keep it long term. In most instances, if someone leaves the company, they would be able to take this with them and keep paying the premiums directly to the insurance provider instead of payroll deduction, and hold on to the policy as long as they would like and as long as the policy allows for.
This has been just a simple, high level touch on some of the different types of life insurance policies we see most often and how they are used in the workplace. As promised, if you’d like a bit of a deeper dive on health insurance for companies and some of these OR you are tired of reading and would like to instead watch some videos on some of these programs, links are all provided below.
June 2022 Blog – It’s time to re-visit life insurance – https://hollowaybenefitconcepts.com/its-time-to-revisit-your-life-insurance-policies-as-we-return-to-normal-life/
May 2021 Blog – Understand Keyman Insurance – https://hollowaybenefitconcepts.com/understanding-keyman-insurance-what-you-need-to-know/
Video – Why Group Sponsored Life Insurance Matters – https://www.youtube.com/watch?v=50s5oRJSH-o
Video – Benefits 101 – The Benefits of Life Insurance – https://www.youtube.com/watch?v=2BTegBVkzdY
Thanks for the time and attention. As always, if we can help you with anything at all, please don’t hesitate to let us know.