*This post is from CMB partner Finuity Wealth. Find out more about group benefit solutions here.
Critical illness insurance can be a valuable addition to any group benefits program—but should it be employer-paid, employee-paid, or offered as an optional add-on? The right approach depends on your company’s goals, budget, and culture. Understanding the trade-offs will help you offer coverage that supports employee well-being and aligns with your organization’s overall strategy.
What Is a Voluntary Critical Illness Benefit?
Voluntary critical illness insurance is paid for entirely by employees through payroll deduction. Employers facilitate the plan but do not contribute to the premium. Employees can choose whether or not to participate, often at a preferred group rate.
Why employers consider this approach:
- Offers employees access to valuable coverage with no cost to the company
- Enhances your overall benefits package, aiding recruitment and retention
- Supports employee financial resilience without increasing company expenses
Understanding the Tax Implications
The tax treatment of critical illness insurance differs depending on who pays the premiums:
- Employee-Paid (Voluntary) Plans:
Premiums are paid with after-tax dollars. If a claim is made, the lump-sum benefit is received tax-free. This structure is straightforward and minimizes tax complexity. - Employer-Paid Plans:
In most cases, premiums paid by the employer are considered a taxable benefit to the employee. However, the critical illness benefit itself is still paid out tax-free if the employee becomes ill. This means:- The employee pays income tax on the premium as a taxable benefit each year
- But the lump-sum benefit, if triggered, remains non-taxable
Employers should factor this into their communication strategy to avoid confusion and ensure employees understand both the value and the tax treatment of their benefits.
Pros and Cons of Employer-Paid Coverage
Providing critical illness insurance as an employer-funded benefit demonstrates a strong commitment to employee wellbeing—but it also requires budget consideration.
Advantages:
- More employees are covered, reducing financial stress across the workforce
- Supports retention and loyalty through meaningful protection
- Builds goodwill and aligns with a wellness-focused culture
Challenges:
- Premium costs add to your overall compensation budget
- May be underappreciated by employees unless communicated effectively
Striking the Right Balance
Some companies offer a hybrid approach—providing a base level of employer-paid coverage with the option for employees to top up at their own expense. This can help manage costs while offering flexibility and enhanced protection.
It’s also worth considering:
- Employee demographics: Younger employees may be less likely to value critical illness insurance, while older employees or those with dependents may see it as essential.
- Industry norms: In competitive sectors, a richer benefits package may give you an edge.
- Communication strategy: The success of any benefits offering depends on how well it’s explained and promoted.
Build a Strategy That Fits Your Team
There’s no one-size-fits-all answer when it comes to offering critical illness insurance. Whether you fund it fully, partially, or not at all, the key is to design a program that meets your people where they are.
Finuity Wealth can help. We work with employers to design group benefits strategies that protect employees and support long-term business goals. Let’s explore what structure makes the most sense for your organization.