Insuring Your Boss: Can You Get Life Insurance On Them?

Life insurance is a crucial aspect of financial planning, offering peace of mind and security for loved ones in the event of an individual's death. While typically associated with personal policies, life insurance is also prevalent in the professional realm, with many employers offering it as an employee benefit. This type of insurance, known as group life insurance, is often provided as part of a benefits package, offering employees a convenient and cost-effective way to obtain coverage. However, it's important to note that this type of insurance is usually tied to the duration of employment, and the level of coverage may not meet all financial needs.

Corporate-owned life insurance (COLI)

COLI is also known as company-owned life insurance, dead peasant insurance, and employer-owned life insurance (EOLI). It can be structured in various ways to accomplish different objectives. One common use is to fund certain types of non-qualified plans, such as a split-dollar life insurance policy, which allows the company to recoup its premium outlay by naming itself as the beneficiary for the amount of the premium paid. The remainder of the benefit goes to the employee who is insured on the policy.

Another form of COLI is key person life insurance, which pays the company a death benefit upon the death of a key employee. This type of insurance is particularly important if a business cannot quickly or easily replace top executives. Buy-sell agreements are another type of COLI, funding the buyout of a deceased partner or owner of a business. In many cases, the death benefit is used to buy some or all of the shares of company stock owned by the deceased. COLI can also be used to recover the cost of funding various types of employee benefits.

COLI has existed in some form for over 100 years, but it gained a notorious reputation in the 1980s when several large companies, including Walmart, Procter & Gamble, Nestle, and Winn-Dixie, bought COLI policies on thousands of regular employees. This was done for tax benefits, and because the companies did not inform their employees, the practice was criticised and dubbed "dead peasant insurance".

Due to this controversy, COLI is now heavily regulated. Companies must show a substantial economic interest, or "insurable interest", in the employee's life before a COLI contract can be written. The insured employee must also consent to having their life insured and receive written notification of the company's intent to insure them and the amount of coverage. The company must also notify the employee if it is a partial or total beneficiary of the policy. Additionally, companies must submit Form 8925 with their taxes each year that the COLI contract is active and keep adequate records to support the information in the form.

Group life insurance

In the US, the Federal Employees' Group Life Insurance (FEGLI) Program is the largest group life insurance program in the world, covering over 4 million federal employees, retirees, and their families. The Servicemembers' Group Life Insurance (SGLI) program also offers low-cost term coverage to eligible service members.

There are several benefits to group life insurance:

• Convenience: It is simple to start coverage if it is provided by your employer.
• Savings: As employers usually pay for all or most of the premiums, employees can save money.
• Acceptance: Most plans are guaranteed, meaning anyone can be accepted regardless of medical conditions.
• Early protection: For those early in their career who may not have the funds for life insurance, group insurance can provide financial security for dependents.

However, there are also some drawbacks to consider:

• Coverage is often tied to your job, so if you leave, your policy may end.
• Limited choice of policies as employers usually only work with one carrier.
• Coverage amounts may be low, and supplemental insurance may be needed.
• Premiums are not fixed and tend to increase over time.

Basic group life insurance

Group life insurance is a good benefit to have, but it does have some limitations. One downside is that it is often not portable, meaning that if you leave your job, you may not be able to take the policy with you. Additionally, the amount of coverage offered by your employer may not be sufficient to meet your loved ones' financial needs in the event of your death. It is also worth noting that the premiums for group life insurance are not fixed and tend to increase as individuals age.

Despite these drawbacks, basic group life insurance can be a convenient and cost-effective way to obtain a small amount of coverage. Most basic plans are guaranteed, so even individuals with serious medical conditions can qualify. Furthermore, since employers usually cover the premiums, signing up for group life insurance is generally a sensible decision.

Supplemental life insurance

Basic group life insurance is typically an affordable or free policy offered through an employer's benefits program. It usually has a death benefit ranging from $25,000 to one or two times your annual salary, paid out to beneficiaries if the employee dies while employed by the company.

• Low death benefit: Supplemental life insurance can increase the death benefit if the current coverage is too low.
• Replace income: Supplemental life insurance can replace some or all of the policyholder's income for their beneficiary's day-to-day expenses.
• Long-term expenses: Supplemental life insurance can help cover long-term expenses, such as mortgage payments or college tuition.
• Family coverage: Supplemental insurance can cover a spouse or child as part of the policy.
• Health challenges: Supplemental life insurance could be a good option for those who are not confident that their health would qualify them for a policy purchased on the private market.
• Accidents: An accidental death and dismemberment add-on could cover the policyholder if they have an accident at work.

Individual life insurance

There are two main types of individual life insurance: whole life insurance and term life insurance. Whole life insurance provides coverage for your entire life, as long as you continue to pay the premiums. It includes a death benefit and accumulates cash value over time, which can be accessed while you are still alive. Term life insurance, on the other hand, provides coverage for a specific period, such as 10 to 30 years. It often comes with lower premiums but does not last forever. If you purchase term life insurance and pass away before the term ends, your beneficiaries will receive the death benefit.

The cost of individual life insurance depends on several factors, including age, medical history, nicotine use, lifestyle, and the chosen policy type. Generally, the younger and healthier you are, the lower your premiums will be. When deciding how much coverage to get, it's recommended to get a policy that is several times your annual salary. This is especially important if you have dependents or financial obligations.

In summary, individual life insurance offers flexibility and additional protection for your loved ones. By purchasing a policy that meets your unique needs, you can ensure that your beneficiaries receive a financial safety net in the event of your untimely death.

Frequently asked questions