Life Insurance: A Company's Safety Net For Employees

Life insurance is an important benefit that companies can offer to their employees, providing financial security to their families in the event of their death. While it is not mandatory for employers to provide life insurance, it is a valuable perk that can help attract and retain talent, particularly those with families. Basic life insurance through the workplace is typically inexpensive or free, and it is often equivalent to about one year of the employee's salary. However, relying solely on employer-provided life insurance may not be sufficient, and employees may need to purchase additional coverage to ensure their families are adequately protected. This is because employer-provided life insurance usually only covers the period of employment, and the amount may not meet the financial needs of the employee's beneficiaries. As such, it is recommended that individuals assess their financial goals and consider purchasing supplemental life insurance to fill any gaps in coverage.

Life insurance beneficiaries

When it comes to life insurance, a beneficiary is the designated person or entity that will receive the death benefit when the insured person dies. The death benefit is the money paid out to loved ones when the insured person passes away. It is important to choose beneficiaries carefully, as this designation cannot be changed after the fact. Typically, beneficiaries are family members, such as a spouse or children, but they can also be friends or organisations like charities.

When applying for life insurance, it is not necessary for beneficiaries to sign the application, as they are not responsible for the information provided. However, it is crucial to keep beneficiary information up to date, as life circumstances change. For example, getting married, having children, buying a home, or retiring. Annual reviews of the policy are recommended to ensure it aligns with financial goals.

To receive the death benefit, beneficiaries must file a claim with the insurance company, providing a death certificate, the insurance policy, and any other required forms. The insurer will then review the claim, and if approved, the death benefit is usually paid within 30 days. It is important for beneficiaries to be aware of the policy and the insurance company holding it. This can be facilitated by the insured person, or by informing a trusted advisor, such as an accountant or attorney.

There are a few things to keep in mind when designating beneficiaries. Firstly, most financial services companies provide a form or website to designate beneficiaries, and it is important to be specific, providing the full legal name and relationship of the beneficiary. Secondly, some policies have a default order of payment if no beneficiary is named. For individual policies, the benefit is usually paid to the owner of the policy or their estate, while for group insurance, the order typically starts with the spouse, then children, then parents, and then the estate. Lastly, it is worth noting that beneficiaries may have options for how to receive the death benefit, such as a single settlement check or a Retained Asset Account with the insurance company.

Employer-provided life insurance

Life insurance is an important way to protect your family's finances in the event of your death. Many employers recognise this and offer life insurance as a workplace perk, often referred to as "basic group life". This type of insurance is typically "group insurance", meaning one policy covers a defined group of people, in this case, employees of the same organisation.

The amount of coverage provided by employer-paid life insurance is typically capped at low amounts, such as one to two times your annual salary. This may not be sufficient for everyone, and some may find they need more life insurance than they can get through their employer. In this case, it is possible to purchase additional coverage through your employer's plan or by purchasing an individual life insurance policy.

Most employer-provided life insurance is term life insurance, which provides coverage for a specific period, in this case, the period of employment. If you leave or retire from the company, your coverage will usually end, although some plans offer options to continue coverage.

The benefit of receiving life insurance through your employer is taxable, even if the employees are paying the full cost. However, the cost of employer-provided group-term life insurance on the life of an employee's spouse or dependent is not taxable to the employee if the face amount of the coverage does not exceed $2,000.

Medical exams

The medical exam for life insurance usually consists of two parts: a questionnaire and a basic physical exam. The questionnaire covers health-related questions, including any medications the applicant is taking, their dosages, their family medical history, recent hospitalisations, and their lifestyle habits such as smoking. The physical exam typically includes measuring the applicant's height, weight, pulse, and blood pressure, as well as taking blood and urine samples. The exam may also include additional tests, such as an electrocardiogram (EKG). The entire process usually takes around 15 to 45 minutes.

The life insurance company will arrange and cover the cost of the medical exam. The exam is typically conducted by a certified paramedical professional at a location convenient for the applicant, such as their home or office. The results of the exam, combined with the applicant's details provided in their application, help the insurance company place the applicant into different risk categories. This, in turn, helps determine the applicant's life expectancy and premiums.

While medical exams are standard, there are also life insurance policies available that do not require a medical exam. These are often referred to as "no-exam life insurance" or "simplified-issue life insurance". These policies are usually more expensive and may have coverage limits. They can be a good option for individuals with pre-existing health conditions or those in risky occupations, such as firefighters or racecar drivers.

Policy exclusions

Life insurance exclusions are typically controlled at the state level, but insurance companies have the right to decide which of those exclusions they include in their policies to protect themselves from fraud and excessive risk. These exclusions help protect their financial interests by giving them the right to refuse coverage for a particular reason. Exclusions will be listed in the policy at the time of application, so the insured will know which causes of death may not be covered by the policy before accepting it.

• Suicide: If the policyholder dies by suicide within a certain timeframe (usually two years) after purchasing their policy, then a life insurance suicide exclusion likely applies, and the insured’s beneficiaries are not eligible for death benefits.
• Illegal or Criminal Activity: Death while participating in illegal or criminal activity, such as drug deals, DUI crashes, or bank robbery, is typically excluded from coverage.
• Risky Activities: Deaths resulting from risky or dangerous activities, such as skydiving, rock climbing, auto racing, motorcycling, hang gliding, scuba diving, or aviation, are often excluded from coverage.
• Substance Abuse: Death due to drug or alcohol abuse may be excluded from coverage.
• War-time Peril: Travelling to war-torn areas of the world for work or pleasure may not be covered by standard life insurance policies.
• Accidental Death: Some policies, known as accidental death policies, only provide coverage if the insured dies due to an accident. Deaths related to illness, medical issues, or chronic health conditions may not be covered.

Riders

There are many different types of riders, and not all insurance companies offer the same ones. Some common riders include:

• Accelerated Death Benefit Rider: This allows the insured to collect part or all of the death benefit while they are still alive if they are diagnosed with a terminal illness. It may also provide benefits if the insured experiences a qualified life event, such as requiring long-term care or permanently moving to a nursing home.
• Accidental Death Benefit Rider: This provides beneficiaries with an additional payout, usually equivalent to the face amount of the original policy, if the insured dies as a result of an accident.
• Family Income Rider: This rider provides monthly payments to beneficiaries upon the insured's death, intended to replace the income the insured provided.
• Cost of Living Rider: This rider gradually increases the insured's coverage to meet inflation. Premiums also increase with this type of rider.
• Guaranteed Insurability Rider: This rider allows the insured to increase their life insurance death benefit at a later date without undergoing a medical exam.
• Waiver of Premium Rider: This rider covers an insured's premiums if they are unable to work due to a covered disability.

The cost of a rider will correspond with the added coverage or benefits it provides. While some riders are free, many come with a cost, and adding them to a policy will often increase the premium. It is important to read the fine print when considering a rider, as the rules and restrictions can vary greatly from one company to another.

Frequently asked questions