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General Information Business Use of Life Insurance Group Benefits Other Executive Benefits Retirement Plans
This section deals specifically with life and health insurance products which assist businesses in securing their debt obligations, protecting their most valuable employees, assuring the funds are available to fund a business continuation plan and enhancing their employee compensation packages with a comprehensive employee benefits package and retirement plan.
Business Use of Life Insurance
Securing Debt: Many business owners need to borrow funds to meet their start-up and on-going cash flow obligations. Life insurance taken out on the principal(s) will assure the lender that funds needed to repay the obligation will be available should the business owner(s) die. In addition, vendors and customers are more likely to continue their relationship in the event of the death of a principal if life insurance proceeds are available to avoid prolonged disruption in business activity.
Business Continuation: Life insurance can play a key role in funding a business continuation plan. Often the revenue stream from a small family-owned business, or the sale price of that business, is intended to provide the future financial security for the heirs. However, the “good will” of the business owner himself/herself is integral to the value of the business. If the business owner has passed away and a forced sale is necessary, the sale may be made at a significantly discounted price. Life insurance equal to the value of the business will provide the cash needed to hire competent employees to carry on or will make up for lost sale revenues if sold at a discount. But, most importantly, life insurance proceeds payable directly to the heirs will buy the family precious time to decide what to do with their business.
When there is more than one principal owner, life insurance is the least expensive way to fund a buy-sell agreement. A buy-sell agreement is an agreement between owners to buy out a deceased owner’s share of the business in the event of death. This type of agreement assures the remaining owner(s) will retain 100% control of the business in exchange for the deceased owner’s family receiving a pre-determined business valuation (in the form life insurance policy proceeds).
Estate Preservation: Many family owned businesses have much of the value of their estate tied up in the business. If other funds cannot be found to pay any estate tax due, the business may have to be sold upon the death of the owner. Such “forced” sales are often made at a discounted rate. Life insurance to cover estate tax obligations will assure the family that they will not have to sell the business to pay estate taxes.
Key Person Insurance: Most businesses have certain employees whose expertise and relationships are essential to the smooth operation of the business and/or are responsible for revenue generation. Life insurance taken out on such a key employee will provide the business with funds to replace temporarily lost income and to cover the cost of hiring and training a replacement.
Executive Bonus Plans (Section 162 Plans): Employers look for ways to retain and reward their key employees. Under this arrangement, a permanent type life insurance plan is taken out on the key employee. The employer pays a tax-deductible premium, which is considered to be a taxable bonus to the employee. The employee owns and controls the policy and its cash value, which accumulates tax-free until cashed in to supplement retirement or, if the employee dies, a death benefit is payable to the employee’s assigned beneficiaries. We encourage employers to consult with their tax advisor before beginning a Section 162 Plan.
A good employee benefit package is essential to attract and retain valuable employees. There is a wide array of group benefits that may offered through the workplace. Most insurance companies have minimum requirements that must be met for these benefits to be offered, including employer size, employer contribution to premium, participation, full-time employee status, etc. Requirements vary by insurance company, state of situs (where group is located), employer size and company structure (corporation, partnership, etc.). Most popular among the employer/employee group offerings are:
-- Employee Term Life Insurance -- Dependent Term Life Insurance -- Health Insurance -- Dental Insurance -- Vision Insurance -- Short-term Disability Insurance -- Long-term Disability Insurance -- Long-term Care Insurance
Some employers choose to offer non-medical benefits on a group “voluntary” basis, that is, they make the benefits available but the employee pays the premium 100% through payroll deduction. Voluntary benefits allow a smaller employer the opportunity to make big-company benefits available, without bearing the cost of covering everyone in a true employer/employee sponsored group plan. Insurance companies generally offer discounts to employees who enroll in their workplace voluntary benefits, and, depending on participation, may offer some amount of guaranteed benefit. Qualification requirements vary by benefit, insurance company and the number of enrolled employees. Some voluntary benefits are also “portable”, meaning they can be continued if employment terminates by paying the premium directly to the insurance company. Popular voluntary group plans include:
-- Optional Employee Life Insurance -- Optional Dependent Life Insurance -- Dental Insurance -- Vision Insurance -- Short-term Disability Insurance -- Long-term Disability Insurance -- Long-term Care Insurance
Most corporations can offer their employees the ability to pay their share of the expense on a “pre-tax” basis, which means your employees taxable income is reduced, thus lowering their income taxes. Many larger employers also offer their employees the opportunity to set aside additional “pre-tax” dollars to help pay for qualified child care and the out-of-pocket un-reimbursed medical, dental and vision care expenses. These additional pre-tax dollars are called “spending accounts”. Corporate employers also benefit with these pre-tax programs by saving certain payroll taxes. “Pre-taxing” benefits and spending accounts is good for employers and employees alike.
Managing the Cost of Group Insurance: There is no getting around it. Next to the cost of salaries, a comprehensive company group insurance package is often the second most costly item on most business balance sheets. And, with the ever-increasing cost of medical care and prescription drugs, the spiral seems out of control for many employers who find double digit premium increases hard to balance with single digit or even $0 increase in revenues. And, of course, employees still want raises, too. What options do employers have to help hold down the cost of group benefits? Here are some ideas:
Educate, Educate, Educate -- Making sure your employees know how to access the most cost effective in-network benefits whenever possible doesn’t happen by accident. It requires work on the part of the employer to make sure that benefit education is a priority with new hires and old-timers alike. Most employees want to get the most out of their plan so they can keep their out-of-pocket costs to a minimum. In addition, employees frequently don’t understand that rate increases are often a direct result of utilization. This is especially true for larger employers that are “experience” rated. By educating your employees to make wise choices for themselves and their families, the employee can make an immediate impact on their personal bottom line and help the group have a more attractive renewal down the line. It’s not hard for employees to understand that if employer rate increases can be held a minimum, future increases in payroll deductions and/or benefit cuts will be less likely.
There are also some intangible side effects of benefit education. When employees know how much their employer is investing in their health insurance, they are more likely to consider their group benefits as a key component of their entire compensation package. Healthy employees who rarely use their benefits will typically not know how good they have it. Helping to educate all employees about the important safety net you are providing will increase their appreciation, even if they don’t ever need to use the benefits.
Review Benefits Annually -- It is important to look carefully, line-by-line, at the coverage you offer. Sometimes a few strategic benefit “tweaks” can really add up to savings. This is especially true of medical, prescription drug and dental plans, where most of the increases in premium are being felt. Consider raising co-pays, deductibles and out-of-pocket maximums to keep pace with inflation. As more employers offer HSA’s (Health Savings Accounts or Consumer Driven Health Care) in the future, you may find this to be right option for your group.
Reviewing benefits every year does not necessarily mean you need to get competitive quotes each year. Small groups (under 50 employees) may in fact find annual shopping worthwhile, as their rates are not generally based on their groups own experience and tend to be more volatile due to age-band increases and claims losses overall in their communal “pool”. Larger groups, however, should limit their “market” searches to when the renewal is not “fair”, service is poor, desired benefits are not offered by your current carrier, etc. The internal cost of changing plans (such as time lost from work due to enrollment and educational meetings, morale issues caused by uneasiness of “change”, disenfranchisement of provider network changes) need to be carefully weighed against the actual premium cost savings. If service is good and benefits serve your employees well, it is always better to negotiate with your current carrier and change only as a last resort.
Know the Current Trends -- It is important to know what is happening in the marketplace, to know what other employers are doing to manage their plans and how future trends may affect your rates and benefits. There are many sources available on-line and in the print media that will give you food for thought as you begin to strategize for the future, but we know this is a big task and easier said than done. At Tidewater Benefits we strive to stay on top of the curve by offering you links to helpful sites, articles in the media and interesting tidbits that keep you informed. Feel free to check back with our site often for new updates or call to arrange an appointment to discuss your situation in more specific detail.
Know your In-Network Utilization Percentage -- If your medical, dental and vision plans have both an in-network and out-of-network benefit level, ask your insurance company what % of paid claims were in-network. If you find that less than 70% of paid claims were incurred out-of-network, that means your employees are not maximizing the network discounts available through your plan. Consider lowering your out-of-network benefits to encourage higher in-network usage and invest in re-educating your employees on how to get the highest level of plan benefit. Larger companies (those over 50 employees) are more likely to be able to get this information from their carrier.
Review Utilization Reports -- If your group is over 100 employees, insurance companies will generally make claim reports available to you and your broker. If possible, get reports on a month-to-month basis, with the following information included: total paid premium by line of coverage, total paid claims by line of coverage, total number of covered employee and dependents. By reviewing this information on a quarterly basis with your agent/broker, you will be able to better anticipate renewal rate actions and plan for them accordingly.
Consider “Alternate Funding” -- If you have more than 50 employees, there are alternative ways for you to pay for your health, dental and vision benefits. Please contact us if you are interested in learning more about whether alternative funding options are right for your company.
“Hire” a Knowledgeable Agent/Broker Who Works for You -- An independent agent/broker is someone who can shop your plan and place you business with almost any insurance carrier. Some employers will invite two, three or even more agents to quote on their group package at the same time, thinking this is the way to get the best rates possible. In fact, this is not true. In most states, “small group” rates, benefit options and agent commissions for groups of less than 50 employees are “filed” with the state where the business is located, and are not a negotiable items. If true apples-to-apples proposals are requested for a “small group” company with the same effective date by two or more brokers, the rates will be the same. If the rates vary, it will be because the information provided to the carrier varied (maybe an error in employee census data, for example) or different benefits or effective dates were requested.
If a group has more than 50 or 100 employees (depending on the state and insurance company portfolio), then there is a lot more flexibility in the product offerings, rates and commissions. Some insurance companies will only issue a quote to the first broker who requests one, while some insurance companies will only issue a quote to a broker who has a letter from the employer requesting he/she be the “broker of record” for the shopping process. In any case, the larger the employer, the more negotiating will be done on your behalf by your chosen agent/broker.
It is our opinion at Tidewater Benefits that the employer should interview and select one independent agent/broker of high integrity with whom they can build a comfortable working relationship, who understands your corporate climate, who knows which “markets” best suit the needs of your employees, who knows how to negotiate a fair renewal, who knows how to help educate you and your employees, who knows how to shop for and evaluate the validity of quotations, who is there to help solve service issues when they arise and, most importantly, someone in whom you are willing to place a high degree of trust. It is our experience that the best rates can be negotiated when carriers know unequivocally who represents the interests of the employer. We believe that the agent/broker, employer and insurance company triangle should be a three-way partnership—a partnership where all parties perspectives are respected and the best possible outcome is the one that benefits the long-term goals of the client.
Our agency began in 1983 by specializing in group insurance; our other lines grew from there. Our slogan “Small by Design to Serve One Client at a Time” is an outgrowth of our commitment to serve our clients, both group and individual, with the same care and concern with which we wish to be treated. If you would like to discuss how we can help your business manage your group insurance package, please feel free to contact us.
Unlike group insurance which is designed to benefit all employees within a class equally, there are several benefits that can be purchased by an employer for select employees. Section 162 Plans (see Life Insurance section above) described earlier is an example. Other examples of benefits that may be offered to key and management personnel are as follows:
Supplemental Disability Income Policies (DI): Group long-term disability plans usually have a salary cap that does not provide the highly compensated employees a full 60% of their salary. In addition, if the group disability insurance is paid by the employer, any benefit paid would be subject to regular income taxes. Employers may “carve out” highly compensated employees and purchase individual disability income plans for them. Such plans are fully portable and, if premiums are paid for by the employee with after tax dollars, any benefits paid would be paid out income tax-free. An alternative is to purchase the additional amount of coverage over and above the group benefit cap to assure highly compensated employees receive 60% of their pre-disability earnings.
Long-term Care Policies (LTC): Employers can purchase individual long-term care policies for their key employees. These policies can be stand-alone LTC contracts, or can be universal life contracts with a long-term care rider. Individual executive contracts of either type are portable.
At Tidewater Benefits, we are insurance professionals who sell and service the products to fund qualified retirement plans. All retirement plans we set up are funded with annuity products. We do not give tax or legal advice. As always, we encourage you to consult with your accounting or legal advisors to address your specific situation and needs. If desired, we will be glad to work with your other consultants to be sure your program is set up as advised.
Simplified Employee Pensions (SEPs): These retirement plans were established with the smaller employer and the self-employed in mind. They allow employers to set up tax-qualified Individual Retirement Accounts (IRAs) for themselves and their employees.
These plans are popular because: --They are easy to set up (less paperwork and reporting) --They are less costly for the employer to administer --Have higher contribution levels than private IRAs.
401(k) Plans: These plans are designed for mid-sized and larger corporate employers, and allow employees to set aside a certain percentage of their salary for retirement, subject to IRS maximums. Contributions are pre-tax and are invested at the employee’s choice in a selection of funds pre-selected by the employer. Employers generally match a portion of the employee contribution to encourage participation in the program.
Profit Sharing Plans: Corporate employers may share a percentage of their business profits with their employees in a Profit Sharing Plan. Discretionary contributions to this type of plan can be re-evaluated annually based on earnings and corporate profits.
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