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Life Insurance: How It Adds Value To Your Employee Benefits Plan

Posted 2 years ago on · Permalink

Many initially feel that life insurance is not a necessary component of a group plan, citing that they already have some in place. However, as discussions deepen, the number of individuals who don’t know what or how much coverage they have in place is surprising. And, in many instances, they have “mortgage” insurance (bank’s description) whereby the bank, (not a loved one) is the beneficiary.

Why Group Life Insurance?

Group life insurance is low in a cost. Plus, depending on the group size, medical underwriting may not be required which can be extremely important to employees who may otherwise be uninsurable. Within group plans, the life insurance component is often mirrored with accidental death & dismemberment which means that double the benefit will be paid if the death is accidental.

Common Structure Of Group Life Offerings

While flat amounts are available, as part of compensation, it is not unusual to provide a life insurance benefit based on an individual’s earnings. In larger groups, you may opt for differences in that option between different subgroups or ‘classes’ of employee. For example, senior roles within the organization that have a larger impact on the company’s financial outcomes may have a benefit that is 2x or 3x of their annual earnings.

Taxability Of Benefits & Probate

Life insurance premiums paid by the employer on the employees’ behalf is considered a taxable benefit. This simply means the premium is subject to income tax and will show up in box 40 of their T4 slip. The payout of these benefits, however, are tax-free to the beneficiary and they’re not subject to probate.

Two important caveats to this are when there is no named beneficiary and a minor being designated a beneficiary without a named trustee. In the first example, when there is no named beneficiary, a life insurance benefit is paid out to the estate and becomes subject to probate. Additionally, where the beneficiary is a minor and there is no named trustee, there can be months of delay and legal proceedings in order to have a trustee named after the fact and recover the benefit.

When you consider the nominal cost to your organization, whether you are providing a flat $25,000 – $50,000 or an earnings-based life insurance benefit, when you’re dealing with grieving families, as an employer, you have a large impact when you help them through the worse situation their family has to encounter.

 

Wendy Matton
wmatton@hmabenefits.ca