A life insurance policy is a valuable benefit for small businesses looking to support their employees and their families. This type of policy is essentially a contract between employers and insurance companies. As a small business owner, you can offer life coverage as part of your overall benefits package. In short, life insurance plans help employees secure financial protection for their loved ones.
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How Does Small Business Life Insurance Work?
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Types of Small Business Life Insurance
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The Cost
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How to Choose Your Coverage Amount
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How to Choose the Right Policy
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How Does Small Business Life Insurance Work?
Employees typically pay a monthly premium, and if they pass away, the insurance company will provide the beneficiaries they have chosen with a death benefit. A death benefit is a one-time payment in exchange for the premium payments that you made during your lifetime. In general, beneficiaries are free to spend the money however they see fit, covering costs like recurring bills, mortgage payments or the cost of education for a child.
In short, life insurance allows small businesses to offer their employees a financial safety net, ensuring that their families will be taken care of. In addition to providing team members with a way to plan for their future, life policies also enhance overall job satisfaction, retention and recruiting efforts.
Types of Small Business Life Insurance
There is a wide variety of policies to choose from. No matter your employee’s requirements and preferences, there is a policy out there. When you start looking for a small business life insurance policy, the first decision you’ll have to make will be between the two main types of coverage:
- Term life insurance
- Permanent life insurance
The best policy for you depends heavily on what you need, including whether you require a short- or long-term policy.
Term Life Insurance
Term life insurance is the most popular type of policy because it tends to be the most affordable. With a term policy, you select a specific length of time that you want coverage, typically 10, 15, 20, 25, or 30 years. With that being said, you can get a policy for as few as 5 years, depending on your needs and what your preferred insurer offers.
Another plus to these policies is that premiums never change during the time frame that you choose. As long as you have paid these premiums, if you pass away during the term of your policy, your beneficiaries will be able to file a claim for the death benefit and receive the money without having to pay taxes on it.
You may be able to renew your policy after the term has ended in one-year increments. This is referred to as guaranteed renewability. However, the price of your renewed policy will increase on an annual basis.
You will have to apply in order to get a term policy; your chosen insurer will determine your risk level before offering you coverage. This is known as “underwriting,” and it typically involves undergoing a medical examination to assess your health, as well as questions about your profession, hobbies, and your health history. Rates may increase if you engage in potentially harmful activities, such as scuba diving. Insurance costs can also go up if you work in a hazardous environment, like on an oil rig. It’s important to note, though, that there are certain term policies that do not require a medical exam, but they may be more expensive, or offer a smaller death benefit.
Permanent Life Insurance
A permanent life insurance policy remains in effect for the entirety of your life, provided that you continue to pay your premiums. This type of policy is generally more expensive than a term life policy because it will never need to be renewed.
There are several types of permanent policies, including:
Whole Life Insurance
Also known as traditional life insurance, this type of policy is guaranteed to remain in place for your life. Whole life insurance not only provides a benefit to beneficiaries upon passing away, but it also includes a savings component. Meaning you will accrue a cash value when you pay your premiums. Interest will also be accrued on a tax-deferred basis at a predetermined rate throughout the term of the investment.
Universal Life Insurance
Universal life insurance policies offer more flexibility when compared with whole life policies. You’ll be able to choose between multiple options for both your premiums and your death benefit. As well be able to change your premium rates throughout the life of the policy as your cash value grows.
These policies, like whole life policies, also have a cash value. Your premium price will include both the cost of insurance (COI), and the accrual of your cash value. The price of this premium will be dependent on your age and risk level.
Indexed Universal Life Insurance
The primary difference between indexed universal life insurance (IUL) and traditional universal life policies is how cash value is accrued. Instead of only being able to grow based on a fixed rate, the cash value with IUL can also grow based on a stock index. Which is a predetermined grouping of various stocks.
IUL provides the same flexibility to change your premium as your cash value grows as universal life does, with the potential to one day have all of your premiums paid for by the cash value you have accumulated. This is known as a “zero-cost policy.”
Variable Universal Life Insurance
The term “variable universal life” (VUL) refers to a specific type of permanent life insurance policy that includes an integrated savings component and makes provisions for the investment of your cash value. The premium is adjustable, just like it is with standard universal life insurance. The cash value can be invested thanks to the investment subaccounts offered by variable universal life insurance. The subaccounts perform a function that is similar to that of a mutual fund. These policies are “variable” since the returns you’ll see with your cash value account will vary based on market fluctuations.
When compared to traditional cash value or whole life policies, VUL insurance will give you greater flexibility and growth potential. But before purchasing this type of policy, you should carefully evaluate the associated risks.
Final Expense
Final expense life insurance, also known as burial, funeral, simplified issue, and modified whole life, is a type of whole life policy that is simple to qualify for. It also provides a modest payout in the event of your passing. This type of policy is an excellent choice for those who are looking for inexpensive whole life policies that have a death benefit ranging from $2,000 to $35,000.
The only big difference between final expense life insurance and other types of permanent life insurance is that this type of policy does not have a cash value. They also have a smaller death benefit as well as lower premiums. The death benefit of final expense insurance is intended to cover expenses for funeral or memorial service and burial/cremation. But with that being said, your beneficiaries will still be free to put the death benefit toward whatever they want.
The Cost
The price of life insurance can vary quite a bit depending on a number of factors. The kind of life insurance policy that you purchase will be one of the most important determinants of its cost. For example, the same amount of coverage for a term life insurance policy will be cheaper than it will be for a whole life insurance policy.
Some other factors that can affect the price of your small business policy include:
- Employee Age – Premiums tend to be lower for younger employees since they have a lower risk of passing away in the near future.
- Employee Gender – According to the National Center for Health Statistics, the average lifespan of a female is approximately four and a half years longer than that of a male. Because of this, in most cases, men pay a higher premium than women do. This rule is not followed in certain states like Montana where insurers must provide gender-neutral life insurance rates.
- Employee Health – Your life insurance premiums will be heavily influenced by the state of your health. While most insurance group life insurance policies don’t require employee medical exams, insurance companies may look at the overall health profile of your workforce.
- Industry and Workplace Risks – Companies within industries with higher-risk jobs may be subject to higher group life insurance rates. For example, a construction company with employees who regularly use heavy machinery would be considered a high-risk occupation.
How to Choose Your Coverage Amount
In order to estimate how much life insurance coverage you should offer to your employees, you should:
- Think about the financial protection that your employees and their families need. Think about a coverage plan that helps to replace your employee’s lost income, pay off debts, and cover future expenses like education and mortgage payments. A common practice for businesses is to offer employees a fixed coverage amount like $50,000. Other owners will simply multiply their employee’s salary by 1 or 2 to come up with the coverage amount. With all that being said, the larger coverage amount you’re able to offer, the more protection your employees and their loved ones will gain.
- Assess your business’s budget. Determine the amount your company can contribute towards employee premiums, and subtract this number from your available fund. While some business owners choose to cover the full cost of their employees’ coverage, others offer life insurance as a voluntary benefit. This simply means that employees can opt in to get the coverage for an additional cost per month.
- Consider long-term affordability. The coverage you provide should be affordable for your business, while also offering meaningful financial support to employees’ families. Finding the balance between these two factors is crucial in getting a policy that satisfies your team and is sustainable for you as an owner.
How to Choose the Right Policy
There are so many options when it comes to life insurance that it can feel overwhelming to make the right choice for you. So, the first thing you should do is determine whether you want term or permanent life insurance.
If a policy that offers life coverage for a limited amount of time is more attractive, you should think about purchasing a term life insurance policy. Term life is also an excellent option if your finances are tight, since the premiums are usually significantly less expensive than those for permanent life. Lastly, if your needs change, you can usually convert your term policy into a permanent policy at a later time. You won’t have to reapply for life insurance or undergo a medical exam if you convert your term policy to a permanent plan. This is thanks to the term life conversion option.
A permanent life policy, on the other hand, is a good option if the accumulation of a cash value is a priority for you and your team. With that being said, these policies generally come at a higher cost. Due to this factor, they are less commonly adopted by employers.
All in all, the type of policy you decide on depends on you and your team’s preferences and future goals. With that being said, term life insurance is the more typical addition to employee benefits packages as they offer broad coverage and are lower in cost.
Get Small Business Life Insurance Today!
Everybody has their own unique set of requirements, priorities, and financial constraints. At EZ.Insure, we know that you want the best coverage for yourself, your employees and their families, but we also know that you have to stick to a budget.
Our user-friendly platform offers free, no-obligation quotes, side-by-side plan comparisons and 24/7 access to licensed insurance professionals. Don’t let your team go uninsured any longer. Instead, get a small business life insurance policy and protect their loved one’s futures, today!
To get started, simply enter your ZIP code in the box below, or give us a call at 888-788-4649.