Diversification’s Easy Button

Add to your agency’s revenue stream with group term life insurance.

The first half of 2007 has presented independent agencies with some financial challenges. The soft market has put pressure on the bottom line as rates decrease in most lines of coverage. Commercial lines coverage has been particularly hard hit with significant rate decreases in certain market segments. While the market will eventually harden, it could take several years. From a planning and budgeting standpoint, agency principals need to find counter-cyclical revenue streams to mitigate the impact of a soft market. Could term-life insurance be the solution?

Some agencies may be weary of adding life-health products to their offerings because of disappointing past attempts. Many principals haven’t been able to build a sustainable and growing l-h book of business for several reasons. First, the agency may not have adequate life-health CSR support, so the l-h producer gets bogged down with service work and cannot grow his or her book after the first two or three years. Second, determining adequate compensation for the l-h producer and the agency is always tricky and requires finesse. Lastly, the sophistication of rules pertaining to health insurance, including COBRA, HIPPA and FMLA, make it challenging to have a very small health insurance department as it’s difficult for one person to stay on top of the rules, produce business and service accounts.

So what can an agency principal reasonably do to bring in new revenue from existing accounts? The answer is to offer and market group term life insurance and voluntary life insurance to your commercial lines book of business. This is still a viable option for agencies that do not want to wade into health insurance because it’s far less complicated to implement and has fewer day-to-day service requirements than medical insurance.

Employer Benefits

There are several reasons why an agency should explore providing group life insurance—and possibly voluntary life insurance—coverage. First, there is an incentive in the tax laws for employers to provide group term life insurance. Internal Revenue Code Section 79 contains an exclusion on the value of the first $50,000 of group term life insurance coverage provided under the policy as long as the employer does not “discriminate” in the design and availability of the coverage. This means that the employee’s beneficiary is not taxed on the payout in the event of the employee’s death and the employee is not taxed on the employer’s contribution. If the coverage exceeds $50,000, then the employer must show the imputed value of the cost of coverage according to the IRS Table indicated in the following table:

IRS Cost of Coverage Table
Age of Employee Monthly Cost per $1,000 of Excess Coverage

When using this table and calculating the imputed taxable income, note that you must use the age of the employee as of the last day of the calendar year.

Agents need to stress to customers the importance of assigning responsibility for calculating the imputed value of coverage that exceeds $50,000 and reporting it at year’s end on employees’ W-2s. For example, let’s take a 44-year-old employee who receives two times his base salary of $75,000 from his employer. This translates into imputed income of $120 annually that needs to be furnished on the employee’s W-2: ($75,000 2 2 = $150,000 – $50,000 = $100,000/1000 = $100 2 .10 = $10 a month 2 12 months = $120 annually).

Aside from the tax savings, there are other advantages employers gain by offering coverage. A small business that has a key employee with health problems will benefit from the guaranteed issue amount provided under the employer policy. For example, for a business with 10 full-time employees, with one times salary as the benefit, the insurance company may allow up to $100,000 per person without evidence of insurability under the guaranteed issue guidelines. This can be very valuable to the employee.

Also, if a high enough percentage of the workforce purchases additional voluntary coverage, it may allow employees to purchase an additional $50,000 or more of coverage without evidence of insurability. In order to gauge whether there is interest in providing voluntary coverage (it can be either term or permanent coverage, which is portable), the employer can have enrollment meetings (also referred to as “worksite marketing”) to see if the minimum participation requirements would be met.

Group Appeal
Independent agents have a unique market opportunity because they write liability and p-c coverages tailored to associations and colleges. Offering some level of group term life insurance and the opportunity to purchase voluntary life insurance is a great value-added membership benefit. For example, the Divers Alert Network (DAN) offers up to $200,000 of voluntary life insurance for its members to purchase. Since there can be limitations or ratings assigned to scuba divers when they apply for life insurance on their own, this is a very valuable and smart benefit for members.

Another example is the voluntary benefits program offered to the University of Washington Alumni Association, which allows members to purchase a variety of life insurance programs and even long-term care insurance. The Institute of Electrical and Electronics Engineers, Inc., offers group term life insurance to its members, and the IEEE reports that nearly 40% of all eligible members take advantage of the coverage.

The number of potential riders is an advantage of offering group life insurance through employers and associations. For example, The Hartford offers the following options for associations and affinity groups:
• Living benefits option—receive a portion of the death benefit while living, if terminally ill;
• Spouse continuation provision—a spouse’s coverage can continue even after the death of an insured member;
• Waiver of premium—pay no premiums in the event of a disability;
• Conversion privilege—no proof of good health required to convert to an individual policy; and
• Senior and joint term life—no termination age for retirees and their spouses age 50 and over, and joint plans for husbands and wives.

Commission Structure
There is a variety of commission revenues depending on the type of product: group term life, voluntary term life and voluntary permanent life insurance. Term life insurance commissions can vary with the level of premium, but they typically range from 3% to 5% of the total premiums and renew every year. Permanent life insurance commissions can range from 15% to 40%, but most of the commission stops after the first year.

The opportunity to gain additional revenues from existing commercial accounts is a viable business strategy. A number of insurance companies provide group term life insurance and can assist with enrollments, including Aflac, MetLife and The Standard. Agents will need to review the carrier’s product line, administrative and enrollment capabilities and other considerations to determine which carrier to select. It is important for agents to ask if the commission levels will vary depending on the level of enrollment support provided.

Now is the opportune time to review your agency’s commercial book of business to target group term life insurance prospects and to mitigate the hard and soft p-c markets.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA contributing editor.

Marketplace Potential

Some agency principals might believe that if they don’t write an organization’s medical insurance coverage, they will be boxed out of writing life insurance. However, there are a large number of companies that contract directly with an HMO/PPO for life insurance. If the agency wants to write the group life insurance coverage only, it could refer another agency or brokerage that would write the health insurance but not the group term life insurance. And the potential marketplace is huge for groups as small as five to 10 up to the very largest organizations.