Group Life Insurance Calculation: Understanding The Premium Formula

Group life insurance is a single contract that provides coverage to a group of people, usually employees of the same company. The employer owns the policy, which covers the employees. The purpose of group life insurance is to provide financial peace of mind for employees and their families, knowing that they will have some security if the insured person passes away. While group life insurance is a valuable perk, it has its pros and cons. So, how is group life insurance calculated?

Fixed multiple-of-earnings benefit plans

This type of plan is a valuable employee benefit that provides financial protection to a designated beneficiary in the event of the insured person's death. The benefit amount is usually rounded to a stated dollar amount. Fixed multiple-of-earnings benefit plans are one of the most common types of group life insurance policies, along with variable multiple-of-earnings benefit plans, flat-dollar-amount benefit plans, and variable-dollar-amount benefit plans.

Group life insurance is typically provided by an employer and covers all employees of the company. It is generally less expensive than individual life insurance as the employer pays all or most of the cost. It is also often easier to qualify for, as there is usually no medical exam required for entry. The purpose of group life insurance is to provide peace of mind for employees and their families, knowing they will have some financial security should the worst happen.

The cost of group life insurance varies depending on the employer, the insurance company, and the characteristics of the group, such as the average age of the employees. The younger the employees are, the less expensive the premiums will be, as age correlates with mortality risk. The number of employees also affects the cost, as more people means a higher chance of claims, which leads to a higher risk for the insurers.

Variable multiple-of-earnings benefit plans

For example, if an employee's salary is below a certain threshold, the death benefit might be equal to their annual salary. However, if their salary exceeds that threshold, the death benefit could be two times their annual earnings. This type of plan offers a flexible approach to calculating group life insurance benefits, ensuring that the payout is commensurate with the employee's income level.

The advantage of variable multiple-of-earnings benefit plans is that they provide a more tailored level of protection for employees. Unlike fixed plans, which offer a standard multiple of earnings, variable plans can adapt to different income levels and provide a more appropriate level of coverage. This can be particularly beneficial for companies with a diverse range of employee salaries, as it ensures that lower-income workers are not underinsured while also providing adequate coverage for higher-income earners.

Additionally, these plans can help employers manage their costs. By setting thresholds, employers can control their financial exposure while still offering a competitive benefits package. This flexibility can be advantageous for companies with varying salary structures or those seeking to balance employee satisfaction with financial prudence.

However, it is important to note that variable multiple-of-earnings benefit plans may be more complex to administer than fixed plans due to the need to consider different earnings thresholds and calculate benefits accordingly. Employers will need to carefully communicate the details of the plan to employees to ensure a clear understanding of the coverage provided.

Flat-dollar-amount benefit plans

Payouts of $10,000 to $25,000 per employee are the most common for this type of plan, but higher amounts are also offered. For example, Principal® group life insurance offers flat benefits of up to $250,000 for a spouse and up to $25,000 for children up to age 26.

As with other types of group life insurance, flat-dollar-amount benefit plans are usually term life insurance policies, which are renewable each year. This is in contrast to whole life insurance, which is permanent and provides coverage no matter when the insured person dies. Whole life insurance policies have higher premiums and death benefits and are the most popular type of individual life insurance policy.

Group life insurance is generally inexpensive, and in some cases, it is provided free of charge to employees. This is because the employer is able to secure lower costs by purchasing coverage for a group of people through an insurance provider on a wholesale basis.

Premium calculation factors

Group life insurance is a valuable employee benefit that provides financial protection to a designated beneficiary in the unfortunate event of an employee’s death. The premium for group life insurance is calculated based on various factors, each playing a distinct role in determining the final cost. Here are some of the key factors that influence the premium calculation:

Amount of Life Coverage: The death benefit amount is a crucial factor in determining the premium. Generally, a higher death benefit corresponds to a higher premium. For example, a $10,000,000 policy will have a higher premium than a $5,000,000 policy.

Age of Employees: Age is a significant factor in premium calculation due to its direct correlation with mortality risk. Younger employees typically exhibit lower mortality rates, resulting in lower premiums, while older employees may face higher premiums due to increased mortality risk.

Gender: Women tend to pay lower premiums than men because they have a higher average life expectancy and are perceived as a lower insurance risk.

Health Status: The health status of employees also impacts premiums. Healthier individuals generally have lower premiums, as they pose a lower risk to the insurer. Additionally, policies that require a medical exam tend to be less expensive than those without this requirement.

Number of Employees: The number of employees covered under the policy affects the premium. A larger number of employees increases the likelihood of claims, leading to a higher risk for the insurer and, consequently, higher premiums.

Occupation and Hobbies: The nature of employees' occupations and hobbies can influence the premium. Occupations and hobbies that are considered more dangerous or life-threatening will result in higher premiums due to the increased risk associated with them.

Drinking and Smoking Status: The drinking and smoking habits of employees can also impact the premium. Heavy consumption of alcohol or smoking can lead to a higher chance of health issues, increasing the risk for the insurer and resulting in higher premiums.

Geographical Location: The location of the company can be a factor if the country has a high risk of war, terrorism, or natural disasters. This elevated risk is reflected in higher premiums.

Payment Schedule: The ability of the company to make frequent payments can lower the premium. Paying premiums annually or quarterly can result in cost savings for the company.

It is important for both employers and employees to understand these factors to effectively evaluate and compare group life insurance options and make informed decisions regarding their employee benefits and coverage needs.

Group life insurance types

Group life insurance is a single contract that provides coverage to a group of people, typically those who work for the same company. The employer owns the policy, which covers the employees. The most common type of group life insurance is group term insurance, which is typically renewable each year. This type of insurance only provides a death benefit and is the least expensive option. Here are some other types of group life insurance:

Basic Group Life Insurance

Basic group life insurance, also called supplemental life insurance, is usually free, and employees are automatically enrolled. This type of insurance is typically offered as part of a larger benefits package and provides basic coverage. The coverage amount is often limited and may not be sufficient as standalone coverage.

Voluntary Life Insurance

Voluntary life insurance is additional coverage that employees can purchase if they want more than what is offered by the employer. This type of insurance may require employees to submit a medical questionnaire or an "Evidence of Insurability" form for approval by the insurance company.

Voluntary Dependent Life Insurance

Voluntary dependent life insurance is additional coverage that employees can purchase for their spouse, partner, or children through their workplace benefits. This type of insurance allows employees to extend the benefits of group life insurance to their families.

Group Universal Life Insurance

Group universal life insurance is more expensive than group term insurance but offers the opportunity to build cash value alongside the death benefit. This type of insurance provides more flexibility and can be a good option for those who want additional benefits.

Variable Group Universal Life Insurance

Variable group universal life insurance is similar to group universal life insurance but offers an investment option to increase the potential returns on the cash value portion. This type of insurance is suitable for those who want to combine insurance protection with investment opportunities.

The specific types of group life insurance offered can vary depending on the employer or organization providing the policy. It's important to carefully review the details of the policy and consider your individual needs when deciding whether to enrol in group life insurance or purchase additional coverage.

Frequently asked questions