Life Insurance
What is life insurance?
Life insurance is a policy that provides money (a “death benefit”) to the policyholder’s chosen beneficiary, such as a spouse, child or other dependent, if they pass away while the policy is in force. People who have life insurance will pay a single premium or regular premiums during their lifetime to pay for their policy and some company provided life insurance policies are paid for by the company. Life insurance is intended to provide employees’ dependents financial assistance in the event of their death. The amount of the policy they purchase is generally intended to reflect the needs of their family. This may include paying off bills and debts like medical bills and funeral expenses. It can also be intended to provide funds to pay off a mortgage, estate taxes, or cover a child’s education.
Why is life insurance important to a small business?
Life insurance is a desired employee benefit that offers peace of mind to eligible employees and their families. Other advantages of life insurance are that it:
- Is usually competitively priced through group life insurance
- May be paid for by the employer
- Serves as a talent attraction and retention
- Improves individual peace of mind and, thus, productivity
- May offer tax deductions for employers
Tax benefits of offering life insurance
Companies who meet applicable non-discrimination requirements for life insurance can generally exclude the cost of up to $50,000 for employer-paid group-term life insurance from the employee’s taxable wages. This excluded amount is also not subject to Social Security, and Medicare, or federal unemployment (FUTA) taxes. However, if the total coverage exceeds $50,000, the IRS requires employers to calculate the cost of the excess coverage using IRS Table I rates. This amount, reduced by any after-tax employee contributions, must be included in the employee’s wages for Social Security and Medicare tax purposes.
What is the history of life insurance?
Early forms of risk-sharing related to death date back to ancient Greece and Rome, where burial societies were formed to help cover funeral expenses. These groups pooled contributions from members to ensure proper burial upon death. While some accounts associate these practices with Roman soldiers, burial societies became more common among civilians over time. Although these arrangements did not function like modern life insurance, they are considered early precursors to the concept of pooling resources to manage financial risks associated with death. Modern life insurance began to take shape in the late 17th and early 18th centuries, particularly with the development of mortality-based pricing and the establishment of the Amicable Society in 1706. Over time, advances in actuarial science and policy design led to the structured life insurance products used today.
Summary
Life insurance is a benefit that employees can enroll in that allows them to ensure their loved ones receive a financial payment when they pass away. This is a popular employee benefit that can help employers attract and retain talent and provide peace of mind for their employees.
