Coworker Life Insurance: A Smart Financial Safety Net

Life insurance is an important consideration for anyone looking to provide financial security for their loved ones in the event of their death. While there are many options available when it comes to life insurance, one common question people ask is whether they can get life insurance through their employer and if so, what are the implications?

Many employers offer life insurance as an optional benefit, often referred to as group life insurance, which can provide a convenient and cost-effective way to obtain coverage. This type of insurance is typically term-based and covers a defined group of people, usually all employees of the company.

While employer-provided life insurance can be a great perk, there are some limitations to be aware of. Firstly, the coverage is usually tied to your job, meaning if you leave or change jobs, you may lose the policy. Secondly, the coverage amounts tend to be lower and may not be sufficient to meet your financial needs, especially if you have dependents. Lastly, the rates for group life insurance tend to increase over time, and the coverage may not be customizable to your specific needs.

Therefore, while it can be a good idea to take advantage of the life insurance offered by your employer, it is also worth considering purchasing additional coverage through a separate individual policy to ensure adequate protection for your loved ones.

Pros and cons of buying life insurance through work

Pros of buying life insurance through work

Convenience

Getting coverage through work can be relatively simple. The paperwork is often part of your hiring documents, and HR departments are typically on hand to answer your questions.

Price

Basic coverage through work is usually free or offered at a low cost for the employee, making it an easy way to get a small amount of coverage.

Acceptance

Most basic life insurance plans through work are guaranteed, so even people with serious medical conditions can qualify.

Cons of buying life insurance through work

Coverage is tied to your job

Group life insurance is often not portable. This means if you leave your job, you may not be able to take the policy with you. You might be able to convert your group policy to individual life insurance, but the price could go up significantly.

Limited choice

Coverage through work tends to be a type of term life insurance, and employers typically only work with one carrier. Therefore, you won’t find the range of policy options that you might find outside of work.

Low coverage amounts

If you have dependents or a lot of financial obligations, a group life insurance policy could leave you underinsured. Use a calculator to figure out how much life insurance you need. If your group coverage is worth less than this amount, you might want to buy an individual policy on your own to ensure you and your family have adequate coverage.

Premiums aren’t fixed

The premiums for group life insurance go up either on an annual basis or every five years.

Tax implications of group-term policies

Group-term life insurance is a common part of employee benefit packages. Many employers provide a base amount of coverage at no cost, with employees also having the option to purchase additional coverage through payroll deductions.

The first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer is excluded from taxation. IRC section 79 provides an exclusion for this amount, and there are no tax consequences if the total amount of such policies does not exceed $50,000.

However, the cost of coverage exceeding $50,000 must be included in income and is subject to social security and Medicare taxes. This is considered a taxable fringe benefit and is included in the taxable wages reported on an employee's Form W-2. The taxable amount is calculated using an IRS Premium Table, based on the employee's age.

If an employer differentiates by offering different amounts of coverage to select groups of employees, the first $50,000 of coverage may become a taxable benefit for certain employees, including corporate officers, highly compensated individuals, or owners with a 5% or greater stake in the business.

Group-term life insurance policies are generally nondiscriminatory because the amount of insurance is based on a multiple of each employee's compensation. If all requirements are met, the cost of premiums for the first $50,000 of coverage is not included in the employee's gross income for tax purposes.

Employers can also provide group-term life insurance coverage for spouses and dependents, with the cost of coverage for a spouse or dependent up to $2,000 considered a de minimis fringe benefit and excluded from taxation.

Rules for retirees

If you're a retiree, here are some things to consider when it comes to life insurance:

• Do you still earn an outside income? If you're retired and no longer working, you probably don't need life insurance. However, if you expect to owe estate taxes, life insurance can cover this cost. You may also want to use life insurance to bequeath a tax-free sum to your beneficiaries or a charity.
• Do your beneficiaries need more protection? Consider what benefits your family will receive when you die, and whether they will face tax consequences. If your beneficiaries will be in a difficult financial situation, you may want to keep your life insurance or purchase additional coverage.
• How will you pay for your final expenses? If you have enough savings to cover your funeral and other final expenses, you may not need life insurance. However, if you want to cover these costs for your family, you can buy a small life insurance policy.
• Do you have any debt? If you're still paying off debt, it's a good idea to keep your life insurance coverage. Cash value insurance also provides the flexibility to take out a policy loan if unexpected expenses arise.
• What is your family situation? If you have a spouse or children who depend on your income, you should consider keeping your life insurance coverage. Life insurance can also help pay for your grandchildren's future college expenses.
• How can it benefit your estate? Life insurance can be used to pay off business debt, fund any buy-sell agreements related to your business or estate, or even fund retirement plans. Consult an attorney who specializes in estate planning to determine if this is a good option for you.
• Do you have cash value life insurance? If you've accumulated substantial cash value in a permanent life insurance policy, consider your options carefully before cancelling the policy. You may be able to convert your policy to one with a reduced amount of paid-up life insurance and no premiums, or surrender your policy to receive the cash value, which may have tax consequences.

Types and amounts of life insurance benefits offered

There are several types of life insurance benefits that employers can offer their employees. The most common type is group-term life insurance, which is offered to all full-time employees. This type of insurance is typically in effect only for a specific length of time, usually while the employee remains employed by the company. The amount of coverage provided by group-term life insurance is often based on a multiple of the employee's annual salary or linked to their position at the company. Employers usually pay most or all of the premiums for this type of insurance.

In addition to group-term life insurance, employers can also offer other types of coverage, including:

• Group accidental death and dismemberment (AD&D) insurance, which pays benefits to the employee's beneficiary in the event of an accident or if the employee loses the use of certain body parts.
• Business travel accident insurance, which covers the death of an employee while travelling for work.
• Split-dollar life insurance, which is paid by both the employer and employee and includes a substantial investment element. This type of insurance is typically offered only to key employees.
• Life insurance plan riders, which are additional features or benefits that can be added to an existing policy, such as an accidental death and dismemberment rider.

The amount of life insurance offered by employers can vary. Some employers offer a set amount of coverage, such as a $10,000 policy for each employee, while others provide coverage based on a multiple of the employee's salary, such as one, two, or three times their yearly salary. Employers can also allow employees to purchase additional coverage in increments, with the cost based on their age.

It's important to note that the tax implications of life insurance benefits can vary depending on the amount of coverage provided. While the cost of premiums for the first $50,000 of group-term life insurance is usually not included in the employee's gross income, any amount over $50,000 is considered taxable income for the employee.

Riders for Extra Protection

Riders are additional benefits that can be purchased and added to a basic life insurance policy. They allow you to customise your policy and can provide several kinds of protection if you meet their conditions. Here are some of the most common riders:

• Guaranteed Insurability Rider: This rider allows you to purchase additional insurance coverage within a stated period without the need for a further medical examination. This is especially beneficial when there has been a significant change in your life circumstances, such as the birth of a child, marriage, or an increase in your income.
• Accidental Death Rider: This rider pays out an additional amount of the death benefit if the insured dies as a result of an accident. Normally, the additional benefit paid out is equivalent to the face amount of the original policy, doubling the benefit.
• Waiver of Premium Rider: Under this rider, future premiums are waived if the insured becomes permanently disabled or loses their income as a result of injury or illness prior to a specified age. This can be valuable, particularly when the premium on the policy is high.
• Family Income Benefit Rider: In the case that the insured dies, this rider will provide a steady flow of income to family members. This rider is generally purchased by individuals who are the sole breadwinners of their families.
• Accelerated Death Benefit Rider: Under this rider, an insured person can use the death benefits if diagnosed with a terminal illness that will considerably shorten their lifespan. Insurers may subtract the amount received, plus interest, from what the beneficiaries receive upon the insured's death.
• Long-Term Care Rider: In the event that the insured has to stay at a nursing home or receive home care, this rider offers monthly payments. Although long-term care insurance can be bought individually, insurance companies also offer riders that take care of long-term care costs.
• Return of Premium Rider: Under this rider, you pay a marginal premium, and at the end of the term, your premiums are returned to you in full. In the event of death, your beneficiaries will receive the paid premium amount.

Frequently asked questions