Introduction to group life insurance

An employee benefits package covers the cost of goods and services that provincial health care plans may not cover, such as dental, vision, hospital, ambulance, and some prescription drugs. Offering your employees a benefits package can help improve your company morale, retain staff, attract new employees, boost productivity, keep your employees healthy, and grow your business. Some companies supplement their benefits packages with a retirement savings plan to help employees reach their financial goals, and many Canadian employers also include group life insurance.

Because insurance companies charge lower premiums for group life insurance compared to individual policies, participation is generally very high. Most employers offer basic term life coverage for free or at a reduced rate. The basic plan usually covers up to two times the employee’s annual salary, but some plans allow the employee to invest in additional coverage for themselves through payroll deductions. If the employee wishes to extend the life insurance to their spouse and children, most plans have the option to purchase additional family coverage.

What is group term life insurance?

A group term life insurance policy pays a death benefit to a designated beneficiary if the insured passes away while the policy is in effect. It can also help employees and their families by paying policy dividends and experience rating refunds. This type of policy covers a group of people for a pre-defined period, generally one year, but employers can renew the policy annually to maintain consistent coverage. 

How does group term life insurance work?  

Employees qualify for group term life insurance assuming they meet the eligibility requirements, which may include their length of employment or whether they work a certain number of hours each week. One nice feature of group term life insurance policies is that eligible employees are not required to undergo the underwriting process. Insurance companies use underwriting to assess how high a risk a candidate poses when applying for individual policies. Since eligible employees don’t require a medical exam or have to answer any health questions to prove insurability, employees receive automatic coverage, even if they have existing health issues. 

One factor that does change from employer to employer is whether employees are eligible to purchase additional group term coverage for their spouse or children. While some plans only allow additional coverage after a qualifying event like becoming a parent, others allow supplemental group term coverage during open enrolment periods. Extra coverage may require the employee to participate in a simplified underwriting process where they answer questions to determine eligibility rather than enduring a physical exam. The insurance company will then decide whether to extend coverage and at what cost. 

Is a group life insurance benefit taxable?  

Employer-paid life insurance policies are tax deductible as company expenses. Any premiums your employee pays for group life insurance that aren’t considered dependant life insurance or group term insurance are taxable. These amounts are recorded on the employee’s T4 slip and reported on their tax return as a taxable benefit. However, the payout from group life insurance policies is generally tax-free. Companies use many strategies to their advantage when dealing with life insurance policies:

• They can deduct paid premiums as part of a group plan.
• Corporations and sole proprietors may deduct premiums when they use a policy as collateral for a business loan.
• If the organization names a charity as the life insurance policy’s beneficiary, the premiums may qualify as a tax credit for individuals or as a deduction for corporations.

Calculating the benefit

If the employer regularly pays premiums that don’t depend on their employees’ ages or genders, here’s how you would calculate the benefit:

• the payable premiums for an employee’s term life insurance policy

Plus

• the total of all excise taxes and sales, excluding the GST/HST that applies to the employee’s insurance coverage
• all provincial insurance sales tax or insurance levies (7% in Manitoba, 8% in Ontario, and 9% in Quebec) that employers are required to pay on some insurance premiums

Minus

• any taxes and all the premiums the employee paid either through company reimbursements or directly

You would require a detailed calculation for any situation that differs from the above. Updated information is available on the Government of Canada’s website and remember to seek professional advice if you feel it is necessary.

Advantages and disadvantages of group life insurance

A good employer always looks for ways to maximize their employees’ wellbeing. After all, a happy, healthy employee is generally more engaged and has higher productivity and fewer absences. Therefore, offering free life insurance can help you and them in many ways.

Advantages

A group life insurance policy can help ease employees’ minds without taking money from their pockets. Here’s an in-depth look at what offering insurance packages can do for your business:

• Improve employee retention and recruitment: The world has become flooded with employers looking for today’s top talents, so a group life insurance plan may be necessary in order to stay in line with other leading employers. Life insurance is something that many employees look for, especially those with dependants when applying for a new job or deciding whether to leave their current position.
• A small expense with huge rewards: The premiums for group term life insurance policies are usually inexpensive and significantly lower than individual life insurance plans. Plus, you can write them off as a business expense. 
• Less costly than providing bonuses or salary increases: Group life insurance plans don’t come with additional CPP, EI, or Workers’ Compensation rate increases, so they become a more attractive option to employers over bonuses or raises. 

Here are some benefits for your employees: 

• Boost financial security: Give your employees peace of mind with a life insurance plan that pays a sizable cash benefit in the unfortunate event of their death. When employees have financial security, they have one less thing to worry about, making them more productive at work.
• Reduced costs compared to individual life insurance plans: Group term life insurance policies are usually free for the employee or are available at a much lower rate than individual plans. 
• Convenient coverage: Enrolling in group life insurance is more convenient for the employee, since the employer handles all the paperwork. As there’s no medical examination or questionnaire, there’s no worry about rejection due to pre-existing health conditions.
• Conversion privilege: Many group term life insurance plans include a provision for the conversion privilege. This provision enables employees to turn their group policy into an individual plan in the case of retirement or termination of employment without submitting proof of insurability or going through the underwriting process. 

Disadvantages

Group term life insurance allows employees to secure low-cost insurance coverage. While there aren’t any drawbacks to the employer other than the minor expense, employees may have a few complaints about the program that are worth knowing about in advance. 

• Group term life insurance stays tied to the company: Unless you invest with an insurance provider who offers the conversion privilege, your employees’ insurance stays connected to the job. Therefore, their coverage ends if an employee leaves or loses their job, and they must apply for a new term life policy to continue coverage. Depending on the employee’s age and health, a new plan can be expensive. And if they have a serious health condition, they may not even qualify. In this case, no-medical life insurance with limited coverage would be their only option.
• Some plans aren’t very flexible: Employees can customize individual life insurance policies to add supplemental dependants. But with group life insurance, the employer decides whether the employee can add dependants and, if so, who they can add. 
• Group life insurance may not be enough: Most financial experts recommend having at least 10 times your annual salary in insurance coverage when you have the primary income in your household. Most group plans cap the total coverage at one to two times the employee’s base salary . Different people have different life insurance needs, so this may not be enough, but they can always supplement the group plan with an individual plan for extra coverage.
• Group insurance only stays active for as long as the employer continues the plan: If you ever decide to end your group life insurance package, your employees lose their coverage. While most companies don’t terminate group life insurance policies, it’s something to consider before committing to the investment.