Should Employees Decline Life Insurance Over $50K?

Life insurance is a valuable benefit that employers can offer their employees. It is typically provided as group term life insurance, which is often convenient and affordable for both parties. However, it is important to note that employer-provided life insurance usually covers the employee only and may not be sufficient to meet the financial needs of their dependents. While it is a great perk, employees should be aware that it is usually tied to their job, and they may lose this coverage if they leave or are terminated from their position. In such cases, employees might have the option to convert their group policy to an individual policy, but this could result in higher premiums. Therefore, it is generally recommended to have additional individual life insurance to ensure continuous coverage and adequate financial protection for loved ones.

Group life insurance is usually tied to your job

Group life insurance is a single contract that provides life insurance coverage to a group of people, typically employees of the same company. It is usually provided by an employer as a workplace perk and is sometimes referred to as "basic group life". Coverage amounts are often capped at low amounts, such as one to two times an employee's annual salary, and the employer usually covers the premiums. Since it is usually free and employees won't be declined for coverage, it is generally recommended to sign up for group life insurance if it is offered.

Group life insurance is fairly inexpensive, and may even be free for employees, as the cost is spread across the group. The employer or organisation purchasing the policy retains the master contract, while employees who elect coverage usually receive a certificate of coverage, which they will need to provide to a subsequent insurance company if they leave the company and terminate their coverage.

Group life insurance is often tied to your job in that coverage is normally only valid for as long as an employee is part of the group. Once an employee leaves, whether through resignation or firing, their coverage ends. However, some policies are portable, meaning that employees can continue to buy the group life insurance at their own cost after leaving the job. Additionally, employees may be able to convert their group policy to an individual policy, although the price could go up significantly.

While group life insurance is convenient and affordable, it usually only provides basic coverage, which may not meet the needs of all policyholders. It is therefore recommended that employees treat it as a perk and supplement it with a separate individual policy.

Employer-paid life insurance over $50k becomes taxable income for employees

Life insurance is often provided as part of an employee benefits package. While plans will differ, in many cases, these benefits are offered to all employees, with the employer paying part or all of the policy's premium.

The first $50,000 of group term life insurance coverage provided by an employer is excluded from taxable income and doesn't add anything to an employee's income tax bill. IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000.

However, if the coverage is higher than $50,000, there may be undesirable income tax implications. The employer-paid cost of group term coverage in excess of $50,000 is taxable income for the employee. This is known as a taxable fringe benefit. The taxable income is included in the taxable wages reported on an employee's Form W-2, even though they don't actually receive it. This is often referred to as "phantom income".

The cost of group term insurance must be determined under a table prepared by the IRS, even if the employer's actual cost is less than the cost figured under the table. The amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy.

As an employer, if you offer group term life insurance coverage over $50,000 as a fringe benefit to your employees, you must determine what should be included in an employee's taxable wages. You can calculate the amount you need to add as a taxable fringe benefit by using IRS Publication 15-B.

If you decide that the tax cost is too high for the benefit you're getting in return, you can find out if your employer has a "carve-out" plan or is willing to create one. For example, the employer can continue to provide $50,000 of group term insurance and then provide the employee with an individual policy for the balance of the coverage. Alternatively, the employer can give the employee the amount they would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.

Employees can lose life insurance coverage if their job situation changes

Life insurance through the workplace is typically offered through a company's group life plan. While plans vary, these benefits are often offered to all employees, with the employer paying part or all of the policy's premium. Therefore, if you leave your job, you are no longer part of the company's group plan, and your former employer is not required to continue paying for your coverage.

The type of policy you have will determine what you can do with it. In many cases, you will have three choices: cancel the policy, port the policy to another group plan with your new employer (if your policy is with the same company), or convert the policy to an individual life insurance policy.

If you are unable to port your coverage, you may be able to convert your group policy to an individual policy, but you will be responsible for paying the entire premium out of pocket. Generally, if you have no other options, your life insurance coverage will end when you leave your job. That means you'll need to apply for new coverage, either at your new job or independently, based on your current age and health status.

Certain health conditions can make it difficult to find an affordable policy or even make it impossible to qualify for coverage. For these reasons, it's often a good idea to carry additional life insurance independent of what you have through your employer. That way, the policy you have is yours no matter where you choose to work.

Some employer-sponsored life insurance plans are portable or convertible. "Portable" means you can take your policy with you when you leave the company, though you'll probably face higher premiums. "Convertible" policies allow you to switch your group coverage to an individual plan, like whole or universal life insurance, but again, expect those premiums to jump.

Employees can convert group life insurance to an individual policy when they leave

When an employee leaves a company, they are no longer part of the company's group life insurance plan, and the employer is not required to continue paying for their coverage. This means that the employee's life insurance coverage will end unless they take steps to retain it. One option for employees in this situation is to convert their group life insurance policy to an individual policy.

The ability to convert a group policy to an individual policy is known as a conversion privilege. This allows employees to switch to a different type of policy without submitting to a physical examination or going through another approval process. The insurance company will extend coverage based on the fact that the employee was already approved as part of the group life insurance plan.

To qualify for a conversion privilege, the insured typically needs to notify the life insurance company within 31 days of termination of employment with the group policyholder. If more than 31 days have passed, the individual may need to undergo a new approval process, including a medical exam, to obtain an individual life insurance policy.

It is important to note that the cost of an individual policy may be higher than the group policy, as the individual will be responsible for paying the entire premium out of pocket. Additionally, the premium may increase based on the age of the insured at the time of conversion.

Group life insurance is a valuable perk offered by many employers, providing financial peace of mind for employees and their families. By converting their group policy to an individual policy, employees can ensure they maintain this valuable coverage even after leaving their job.

Employees can supplement employer-provided life insurance with a separate policy

While employer-provided life insurance is a good benefit to have, there are several reasons why you may want to supplement it with a separate policy.

Firstly, employer-provided life insurance only applies to the employee, not their spouse or children. If you want to ensure your family is financially provided for in the event of your death, you may need a separate policy. This is especially important if you have non-working dependents, a large family, or special-needs dependents.

Secondly, employer-provided life insurance is usually tied to your job, meaning if you change jobs, are laid off, or leave your position, you could lose your coverage. While some policies allow you to convert a group policy to an individual one, this will likely be more expensive.

Thirdly, employer-provided life insurance may not provide enough coverage. Many employers offer a base amount of coverage, such as $50,000, or an amount equivalent to your yearly salary. However, this may not be sufficient to meet your financial needs or those of your dependents.

Fourthly, employer-provided life insurance typically doesn't offer customization options. A separate policy will allow you to personalize your coverage based on your unique needs and goals. You can select features and riders specific to your situation, such as an accelerated death benefits rider, a guaranteed insurability rider, or a long-term care rider.

Finally, getting a separate policy can help you avoid gaps in coverage. If your health declines and you need to leave your job due to a medical condition, you may struggle to get new insurance. By having a separate policy, you minimize the risk of not qualifying for coverage when you need it most.

In conclusion, while employer-provided life insurance can be a valuable benefit, it's important to consider supplementing it with a separate policy to ensure you and your loved ones have adequate financial protection.

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