Abstract
This paper explores various published articles that address employee insurance programs available for employees in an organization, particularly in the United States. The article discusses different aspects life insurance and disability so that when they are evaluated collectively, they create a rational analysis of the subject of the research. Hasman et al. (2004) explain the current employee insurance situation in the country. Martoccio (2010) and Fronstin (2007) provide a detailed discussion of employee benefits. The discussion available in these two sources tends to create several categories of both life insurance and disability insurance, describing how offering such plans may be beneficial to employees. On the other hand, Williams (2006) focuses on the event of disability for an employee. His explanation of disability insurance creates more insight on what has been included in the other two sources.
Key Words: life insurance, disability insurance, premium, beneficiaries
A study by Hasman et al. (2004) established that many Americans are barely prepared for the financial risk linked with a significant medical event or an unexpected death. According to these researchers, two-thirds of Americans live paycheck-to-paycheck. Furthermore, about half of the United States population has less than 10,000 in savings and 20% have less than 1,000 in savings. Nonetheless, several insurance programs may be available in an organization’s compensations and benefits package (Martoccio, 2010).
There is life insurance, for instance, which is the protection against financial loss if the insured party dies, and is payable to his or her family members, referred to as beneficiaries (Fronstin, 2007). This form of insurance works in such a way that the named beneficiary gets the proceeds and may, therefore, be somewhat protected from the effects of the loss of income. Even though the employer is not obliged to provide this type of insurance, he or she should consider the fact that employees stand to benefit from possible lower rates associated with insuring a group of employees. When an organization provides life insurance for its employees, the latter is protected for the entire period in which they work for the organization (Martoccio, 2010). The management may opt to include a feature that allows employees to carry their coverage with them even when they leave the organization. Moreover, when life insurance covers a person, he or she is aware of the exact amount his or her beneficiaries would get. The amount is independent of the rising and falling of the stock market and would be delivered to the beneficiary as one lump sum that is also tax-free.
Moreover, disability insurance also exists and it provides a significant income protection for employees who get injured and can therefore not work during that period (Fronstin, 2007). The significance of disability insurance is that it reduces the financial load on an employee’s household if he or she suffers an injury or a serious illness. Most of the time, is the Social Security Administration manages this type of insurance in the event of disability for an employee. Any employee who has paid the Federal Insurance Contributions Act tax for a given period is eligible to get the Social Security disability income insurance. This law requires an employee in any organization to contribute a portion of their salary to fund Social Security and Medicare. In case the employee gets physically challenged, he or she gets this income insurance for or more than a year. However, this plan takes effect after five months of disability (Hasman et al., 2004; and Williams, 2006). Separate from the Social Security disability insurance; a physically challenged employee may also be covered by either long term or short term disability insurance if such plans are included in the benefits and compensation package of the organization (Martoccio, 2010). Some organizations offer group disability insurance policies as components of their benefits and compensations package for employees. The employee may also seek coverage through an individual policy by contacting an insurance agent or insurance firm. Thus, the short term and long term disability insurance plans are not provided by the government. Neither are they associated with any public benefit program; rather, they are offered by private institutions. This paper explores several categories of life insurance and disability insurance to determine the potential advantages they may present to employees.
Life Insurance
Term Life Insurance
This is a type of life insurance that has a set time limit on the period of cover. On expiry, it is the policy owner who decides whether or not to renew the term life insurance policy (Fronstin, 2007). This policy gives a predefined benefit in the event of the policy owner’s death, as long as he or she dies within a set period. It follows that the policy does not offer extra returns on the stated benefit. Nonetheless, employees having term life insurance enjoy lower premiums as compared to cash value insurance during the beginning of a term policy (Martoccio, 2010). Furthermore, a term life insurance policy may be used to fulfill other financial obligations, say, repaying a loan. Finally, several term policies may be converted to cash value life insurance in case the employee’s insurance needs change.
Whole Life Insurance
This refers to a type of life insurance whereby the premiums are “level”, and the policy has both an insurance and investment element. Just like any other form of life insurance, this policy pays a given amount to the named beneficiaries upon the death of an employee (Fronstin, 2007). The investment element accrues a cash value that the policyholder may withdraw or use as security to acquire a loan. The difference with term life insurance is that this policy does not terminate until the beneficiaries receive the agreed amount (Martoccio, 2010). Consequently, whole life insurance tends to be costlier than other forms of insurance, making the former less attractive in employer-sponsored insurance programs.
One advantage of this policy is that amount paid in premiums does not increase at any point. For instance, even when the employee is severely ill, the charges remain constant. Another advantage is that the cash value and death benefit are guaranteed, and they cannot lose value, except in cases where the employee decides to withdraw the cash value from the policy. Additionally, whole life insurance pays dividends which are untaxed because they are “returns of premium” (Fronstin, 2007). Suppose an employ pays $1000 into the policy. In this case, the insurer calculates how effective it was with this particular plan at the end of twelve months. Suppose further that the insurance company earns $100 on this policy and decide to return $90 to the employee. This return is not considered to be an outright gain; rather, it is a return of premium, which is not taxable income.
Universal Life Insurance
This is a form of life insurance that combines the low-cost protection of term life insurance and a savings component which is invested with the aim of providing an accumulation of cash value (Fronstin, 2007). The death benefit, savings component, and premium rates may be reviewed and modified depending on the prevailing situation of the policyholder (Martoccio, 2010). Additionally, an employee having universal life insurance is allowed to use the interest from the built-up savings to assist in paying premiums.
This policy is relatively more flexible as compared to the whole life insurance policy because the policyholder is allowed to switch finances between the savings element of the policy and the insurance. Premiums, which vary, are categorized by the insurer into insurance and savings, thereby giving the policyholder an opportunity to review and modify them as desired (Fronstin, 2007). For instance, the policyholder, because the savings element is producing low returns, may decide to use it instead of other sources to pay the premiums. Additionally, an employ having this policy has the chance of expanding his or her cash value of investments at a variable rate that may be modified on a monthly basis.
Accidental Death and Dismemberment Insurance (AD&D)
This is policy is considered to be “rider” of the life insurance policy and covers death through accident and dismemberment. Dismemberment in this respect is used to refer to the loss of use of particular body parts of the policyholder, mostly eyes, and limbs (Fronstin, 2007). This policy holds that the policyholder has to pay twice the charges payable otherwise, or a particular amount of regular income payments. Therefore, this policy is common in organizations where the management provides another alternative to group health plans.
The most significant advantage of this policy is that the premiums are low-cost since accidental deaths have become rare in the recent years. Many organizations, especially the manufacturing and mining ones, focus on safety training for their employees making accidental deaths become less of concern (Martocchio, 2010).
Disability Insurance
Short-Term Disability Insurance
This is a class of disability insurance that pays a specified percentage of an employee’s salary if they get temporarily physically challenged. It is worthy to note that the disability being referred to in this case does not include on-the-job injuries, which exist under employee compensation insurance as explained by Williams (2006). Most organizations have plans that pay about 60% of the pre-tax salary, whereas there are some that pay up to 100% (Martoccio, 2010). This category of disability insurance tends to be less expensive than the long-term disability insurance because the amount of time the policy would have to pay benefits to the disabled employee is relatively low. The period for receiving benefits and the dollar amount the benefits offer is dependent on the cost of the plan.
Long-Term Disability Insurance
This is another form of disability insurance that protects an employee from loss of income because of injury or illness for an extended period. In other words, long-term disability insurance begins where the short-term policy ends (Williams, 2006). Most long-term disability insurance programs pay between 50% and 80% of the pre-tax salary during the period of invalidity (Martoccio, 2010). Like with the short term disability insurance, the amount of time an employee may get benefits and the dollar amount the benefits provide is primarily influenced by the cost of the plan. Many long term policies offer more options for the policyholder, including coverage for the hospital stay and other supplemental insurance to top up the monthly payments. The employer, under such a program, is likely to recover quickly because insurance companies tend to make extra effort to ensure it is so in an attempt to save money. This plan also stands to benefit the employer because he or she would attract employees.
Given the nature of a long-term policy, it is more beneficial for employees who have proper savings or alternative insurance to cater for the initial period of disability, and employees who can pay higher premiums for long-term insurance (Williams, 2006).
References
Fronstin, P. (2007). Employment-Based Health Benefits: Access and Coverage, 1988-2005. EBRI Issue Brief, (303).
Hasman, J. J., Chittenden, W. A., Doolin, E. G., & Wall, J. F. (2004). Recent Developments in Health Insurance, Life Insurance, and Disability Insurance Case Law. Tort Trial & Insurance Practice Law Journal, 453-492.
Martoccio, J. (2010). Employee Benefits, 4th Edition. Retrieved from https://bookshelf.vitalsource.com/#/books/1259220400/
Williams, C. (2006). Disability in the workplace (pp. 75-001). Perspectives (February): Statistics United States.
