Group Life Insurance for Small Businesses


Enter your ZIP code to get started

Shield

Free. Simple. Secure.

Updated: June 12, 2024

Advertising & Editorial Disclosure

Group life insurance for small businesses is a cost-effective way to provide employees with a valuable benefit. This type of policy covers all employees under one contract, often at a lower cost than individual policies.

While group life insurance plans enhance an employee benefits package, making the business more appealing to potential talent, they also have limitations. Coverage is typically tied to employment and may not meet the individual needs of all employees. Employers considering small business group life insurance should weigh these considerations.

Key Takeaways

blueCheck icon

Group life insurance for employees offers essential financial security and is an attractive benefit for attracting and retaining talent.

blueCheck icon

Group life insurance plans are generally more affordable and accessible than individual policies, making this type of policy a cost-effective option for both employers and employees.

blueCheck icon

Group life insurance policies can be limiting; coverage is often minimal, tied to employment, and lacks customization, which may not meet all employees' specific needs.

How Group Life Insurance for Small Business Works

Group life insurance operates under a collective policy that covers a certain group of employees or organization members. Businesses typically offer group life insurance plans as part of an employee benefits package. The employer pays the premiums, which are often lower than the cost of individual life insurance policies due to the risk dispersing across a larger group. The coverage amount is usually based on a multiple of the employee's salary or a flat amount, providing financial protection to the beneficiaries in the event of the employee's death.

Since coverage generally requires employment, employees remain covered under the employer group life insurance as long as they're with the company. If they leave, they may lose their coverage or have the option to convert their group life insurance policy to an individual plan.

Eligibility for Group Life Insurance

Eligibility for group life insurance typically includes all full-time employees within a company, making small business life insurance an inclusive benefit. In some cases, coverage extends to part-time employees and contractors, broadening the scope. Eligibility can differ among group life insurance companies, so it's essential to review the specific terms of a policy.

Life insurance providers may require a certain number of members for a group life insurance plan, which can vary by group life insurance company. Depending on the state, there may also be minimum guidelines on the number of members necessary for group life insurance plans.

Types of Group Life Insurance for Small Businesses

Understanding the different types of group life insurance can help small businesses choose the right policy for their needs. Here's a look at the most common types of group life insurance for small businesses:

  1. 1
    Group Term Life Insurance

    This is the most common type of group life insurance. It provides coverage for a specific term, typically until retirement. Term life insurance is affordable but doesn't offer a cash value component, making it a straightforward option for small business life insurance needs.

  2. 2
    Group Whole Life Insurance

    This group life insurance policy provides lifetime coverage and includes a cash value component. Whole life insurance is more expensive than term insurance but can serve as a form of savings for employees, offering additional value to employer group life insurance.

  3. 3
    Group Universal Life Insurance

    This is a flexible type of permanent insurance that allows adjustments to the death benefit and premium payments. Universal life insurance also includes a cash value component that can grow over time, offering a blend of security and financial growth within small business group life insurance policies.

  4. 4
    Group Variable Life Insurance

    This type of group life insurance for small businesses combines death benefit protection with an investment component. The cash value and death benefit in a variable life insurance policy may change depending on the performance of the investment choices.

The coverage amount for group life insurance through an employer is predetermined, but employees may have the option to increase their coverage through supplemental life insurance. This is an additional life insurance policy that an employee can purchase to supplement the basic group life insurance coverage provided by their employer.

The employee typically pays the premiums for this additional coverage, which one can often purchase without a medical exam. The availability and terms of supplemental life insurance can vary by employer and insurance provider.

Group Life Insurance vs. Accidental Death and Dismemberment Coverage

Employers providing group life insurance policies may pair it with accidental death and dismemberment (AD&D) coverage, which offers additional financial benefits if an employee's death or severe injury occurs due to an accident. This coverage can be an integral part of a group life insurance policy or added for an extra fee.

AD&D insurance provides a benefit if an employee dies due to an accident. It also offers a partial benefit for certain injuries, such as loss of limbs, speech or sight. The payout amount depends on the specific injury, with different injuries receiving different percentages of the total coverage amount. It may also vary per insurance company.

Covered accidents under AD&D insurance include deaths from car accidents, homicide, accidents involving heavy machinery and drowning. It does not cover deaths or accidents resulting from illness or disease, drug overdoses, suicide or natural causes.

Benefits of Group Life Insurance for Small Businesses

Group life insurance can offer several advantages to small businesses and their employees. Here are some of the key benefits of group life insurance plans:

    freelancer icon

    Employee Attraction and Retention

    Offering group life insurance can make a small business more attractive to potential employees and help retain current staff.

    cashCard icon

    Affordability

    The cost of group life insurance policies is generally lower than that of individual policies because the risk is spread across a larger group, reducing the cost per individual. This affordability factor makes group life insurance plans an accessible option for small businesses aiming to provide comprehensive benefits.

    signupBonus icon

    Ease of Enrollment

    Group life insurance policies typically do not require a medical exam, making the enrollment process straightforward and hassle-free for employees. This significantly reduces barriers for employees, facilitating their participation in employer-group life insurance programs.

Adding group life insurance to your benefits package may be a relatively easy and affordable way to boost employee retention.

Advantages of Group Life Insurance for Employees

Obtaining group life insurance through an employer offers distinct benefits tailored specifically for employees. Here are the key advantages of a group life insurance policy for employees:

  • Immediate Coverage: Employees typically receive group life insurance coverage as soon as they join the company, without undergoing lengthy approval processes. This immediate protection ensures they are covered from their first day on the job.
  • Lower Premiums: Group life insurance rates are often lower due to the collective bargaining power that comes with a group. This makes essential life insurance coverage more accessible and affordable for employees at all salary levels.
  • Supplemental Coverage Options: Many group life insurance plans allow employees to purchase additional coverage at group rates. This flexibility helps employees tailor their coverage to meet their personal and family needs better.
  • No Medical Exams Required: Most group life insurance through employer plans do not require a medical exam. This can be a significant advantage for employees with pre-existing health conditions that might otherwise make them uninsurable under standard individual policies.
  • Financial Support for Beneficiaries: Group life insurance policies provide financial security to beneficiaries by offering a death benefit that can help cover expenses such as debts, funeral costs and ongoing living costs.

Drawbacks of Group Life Insurance for Small Businesses

Despite the benefits of group life insurance plans, there are also limitations. Here are some potential drawbacks to consider:

    loanReview icon

    Limited Coverage

    Group life insurance policies often provide less coverage than individual policies. These plans may not be sufficient for employees with significant financial obligations.

    briefcase icon

    Dependent on Employment

    One of the inherent limitations of employer-group life insurance is its direct tie to employment status. Coverage is typically tied to employment. Employees who leave the company may lose their coverage or face higher premiums if they choose to convert to an individual policy.

    insurance2 icon

    Lack of Customization

    Group life insurance policies offer a one-size-fits-all approach, which may not meet the specific needs of every employee.

It's helpful to consult with your employees about what plans would be most beneficial to them in addition to weighing the needs of your business. This approach ensures that you maximize the benefits of group life insurance while also addressing any potential shortcomings of the policy.

If Group Life Insurance Is Right for Your Small Business

Whether group life insurance is the right choice for your small business depends on various factors. It can enhance your benefits package without significant cost, but it's also important to communicate to employees that they may need additional coverage to meet their individual needs.

To determine if group life insurance is right for your small business, consider the following steps:

  1. 1
    Assess Your Employees' Needs

    Conduct a survey or discuss with your employees to understand their insurance needs. This practice can help you gauge whether a group life insurance policy would be beneficial.

  2. 2
    Evaluate Your Financial Capacity

    Review your business's financial situation to determine if you can afford the premiums of a group life insurance policy.

  3. 3
    Compare Insurance Providers

    Research various insurance companies to compare their group life insurance offerings. Look at factors such as coverage, cost of group life insurance and the provider's reputation.

  4. 4
    Consult With an Insurance Advisor

    An insurance advisor can provide expert advice on whether a group life insurance policy would be a good fit for your business. They can also help you navigate the process of choosing and purchasing the right business life insurance policy.

  5. 5
    Review Regularly

    Once you have a group life insurance plan in place, it's important to review it regularly to ensure it continues to meet the evolving needs of your business and employees.

mglogo icon
MONEYGEEK EXPERT TIP

Offering a range of life insurance benefits that employees can choose from, including options for additional coverage, can help ensure that your employees' needs are met. It would also help to consider offering other types of insurance benefits, such as disability insurance, which provides income protection if an employee cannot work due to illness or injury, or health insurance options that cover a wide range of medical services.

How to Get Group Life Insurance for a Small Business

Securing group life insurance for your small business can be a strategic move to protect your employees and their families. Here's a step-by-step guide on how to find the best group life insurance for your company:

  1. 1
    Assess Your Needs

    Determine the level of coverage that would be beneficial for your employees. Consider factors such as your workforce's average age, health status and financial obligations to ensure the group life insurance plans you consider will meet their needs effectively.

  2. 2
    Set a Budget

    Decide how much your business can afford to spend on premiums. This will help narrow down your options when comparing policies.

  3. 3
    Research Providers

    Look into different group life insurance companies to understand their offerings. Consider their reputation, customer service and the specific terms of their policies.

  4. 4
    Get Quotes

    Contact several providers to get group life insurance quotes. This will give you a clear idea of the cost of a group life insurance policy and help you compare plans.

  5. 5
    Review Policies Carefully

    Once you have a few options, review the group life insurance policies carefully. Pay attention to the coverage, exclusions and any additional benefits.

  6. 6
    Consult with an Expert

    If you're unsure about any aspect of the policies, consult with an insurance advisor or broker. They can provide expert advice and help you make an informed decision.

  7. 7
    Purchase the Policy

    Once you've chosen a group life insurance policy that suits your needs and budget, you can proceed with the purchase. The provider will guide you through the process. Review all details, especially the terms of the policy.

  8. 8
    Communicate with Employees

    After purchasing the policy, communicate the details to your employees. Ensuring they understand their group life insurance coverage and claim procedures is pivotal in maximizing the benefits of group life insurance for your team.

Tax Implications of Group Life Insurance for Small Businesses

Premiums employers pay on group life insurance policies are generally tax-deductible as a business expense, according to the Internal Revenue Service (IRS). The resulting savings can lower the overall cost of providing this benefit to employees.

The tax deductibility of life insurance premiums can vary depending on the business structure. Regularly reviewing tax laws can help ensure you're up-to-date should there be changes. You can also consult with a tax professional or financial advisor to understand the specific tax implications of group life insurance.

FAQ: Group Life Insurance for Small Businesses

Understanding how group life insurance works can help you decide if it's suitable for your small business and employees. Here, we answer some common questions to help you make an informed decision about this type of coverage.

How does group life insurance work?

Is group life insurance worth it?

How much does group life insurance for small businesses cost?

Can employees increase their coverage under a group life insurance policy?

What happens to the coverage if an employee leaves the company?

What type of life insurance is most commonly used for group plans?

About Melissa Wylie


Melissa Wylie headshot

Melissa Wylie is the Content and SEO Manager at MoneyGeek, with nearly a decade of editorial experience and six years of work in financial content focused on small businesses. She previously held SEO positions at Bankrate and LendingTree, with bylines on ValuePenguin and MagnifyMoney.

Wylie has a journalism degree from the University of North Texas. Her strong foundation in journalism helps her craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.


sources