Employer's Right To Cancel Group Life Insurance: Explained

Group life insurance is a valuable employee benefit, offering affordable coverage that's easy to qualify for. However, it's usually tied to your job, meaning if you leave the company, your policy will likely not continue. This is because the employer owns the coverage and can decide to stop offering it. While group life insurance is a great perk, it's important to understand its limitations and plan for what will happen to your coverage if you change jobs. This is because, unlike privately-owned life insurance, group life insurance doesn't follow you through career changes.

Group life insurance is usually tied to your job

Group life insurance is often a workplace benefit that is affordable and easy to qualify for. It gives employees and their families a sense of security. However, it is important to understand the limitations of group life insurance. For example, if you leave the company, your life insurance policy will likely not continue.

There are some exceptions to this. Some employer-sponsored life insurance plans are portable or convertible. Portable plans allow you to take your policy with you when you leave the company, although you will probably have to pay higher premiums. Convertible plans allow you to switch your group coverage to an individual plan, but your premiums will also likely increase.

Group life insurance is typically offered as part of a company's group life plan. While plans differ, in many cases, these benefits are 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.

If you want to keep your life insurance coverage after leaving a job, you have a few options. You can 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 want to keep your policy and are unable to port your coverage, you may be able to convert your group policy to an individual policy if your plan allows it. However, you will be responsible for paying the entire premium out of pocket.

Generally, if you do not take any action, your life insurance coverage will end when you leave your job. This means you will need to apply for new coverage, either through your new job or independently from a life company or broker. This may not seem like a significant problem, but certain health conditions can make it difficult or even impossible to qualify for affordable coverage. For this reason, it is often a good idea to carry additional life insurance independent of what you have through your employer. That way, you will have coverage no matter where you work.

Coverage options after leaving a job

Group life insurance is a great workplace benefit that provides low-cost supplemental protection for your loved ones. However, it's usually tied to your job, so if you leave the company, your policy will likely not continue. Here are some coverage options to consider if you're leaving a job with group life insurance:

• Port your policy to a new group plan: If you're moving to a new employer, you may be able to transfer your existing group life insurance policy to their group plan. However, this option is typically only available if your new employer uses the same insurance company as your previous one.
• Convert your policy to an individual plan: You may have the option to convert your group policy into an individual life insurance policy. Keep in mind that you will be responsible for paying the full premium yourself, and the premiums may be higher than before. Federal laws, such as ERISA, require your employer to notify you of this option. You will have a short window of time, typically 31-60 days, to make this decision.
• Cancel the policy: If you don't want to continue with the coverage, you can choose to cancel the policy.
• Apply for new coverage: If you're unable to port or convert your existing policy, you will need to apply for new life insurance coverage. This could be through your new employer or independently from a life insurance company or broker. Keep in mind that your age and health status may impact your ability to qualify for a new policy and the cost of premiums.

It's important to note that the specific options available to you may depend on the type of policy you have and the terms of your employer's group plan. Be sure to review your plan's contract and consult with your HR department or benefits specialist to understand your coverage options when leaving your job.

The actively at work clause

The "actively at work" clause is a provision included in many employer-sponsored group insurance plans to help insurance carriers avoid the exploitation of benefits. This clause defines what it means to be actively at work and outlines the challenges employers face with such clauses, as well as how to correctly incorporate and adhere to them.

According to the clause, an employee is considered "actively at work" when they are performing all the regular duties of their occupation at any of the established business locations of the employer, including any locations they might be required to travel to for work. Insurance plans typically do not begin covering employees until they meet this definition of being actively at work. On the other hand, once an employee's employment is terminated, they are no longer deemed actively at work.

The "actively at work" provision also addresses scenarios where employees are on approved leave. In most cases, employees are considered actively at work when on permitted leave, such as vacation or paid time off, as long as they would be able to perform their duties if they were at work. However, it's important to carefully review the specific insurance policy's fine print to understand how "actively at work" is defined to ensure compliance and avoid unintentional fraud.

The "actively at work" provisions play a crucial role in defining eligibility under group benefits plans, such as medical insurance and life insurance. These provisions outline the conditions under which an employee becomes eligible for specific benefits if something occurs that prevents them from being actively at work. While the length of time an organisation can allow employees who are not actively at work to remain on a group health plan may vary between insurance carriers, the administration of these provisions is generally similar. Insurers often audit eligibility upon large claims by requesting proof of employment, such as payroll records or other forms of verification.

It's worth noting that employers may face difficult decisions when employees are diagnosed with terminal or chronic health conditions. While it may seem like a favour to allow employees to remain on group health plans in such situations, doing so creates a significant liability for the business. Failing to adhere to the "actively at work" clause can result in retroactive cancellation of insurance coverage, and the employer may be required to self-fund the full cost of coverage for the employee. Therefore, it is essential for employers to understand and correctly administer the "actively at work" clause to avoid unintended consequences and ensure compliance with the applicable laws and regulations.

Employer-sponsored life insurance is often insufficient

While employer-sponsored life insurance can be a good benefit, especially if you have no other life insurance, it often falls short of providing sufficient coverage. Here are some reasons why employer-sponsored life insurance is often insufficient:

Limited Coverage

Employer-sponsored life insurance policies typically provide coverage of around 1-2 times your annual salary. However, financial experts recommend having a minimum of 5 to 12 times your yearly earnings to ensure your loved ones can maintain their current lifestyle. This is especially important if you have dependents who rely on your income. Some experts suggest getting coverage worth five to ten times your salary, or even more if you have a non-working spouse, a large family, or special-needs dependents.

Loss of Coverage Due to Job Change

Another significant drawback of employer-sponsored life insurance is that it is often tied to your job. If you leave your job, you may lose your life insurance coverage. This can be a significant problem if you are leaving late in your career or due to health issues. Buying life insurance later in life or with pre-existing health conditions can be much more challenging and expensive.

Cost Considerations

While employer-sponsored life insurance may seem like a cost-effective option, it might not always be the cheapest. The coverage provided by employers tends to get more expensive as you age, with significant increases in price after the age of 35 or 50. In contrast, you can find guaranteed level-premium term life insurance policies on the individual market that lock in the same rate for the duration of the policy. Shopping around can help you find a better rate, especially if you are young and healthy.

Lack of Spousal Coverage

Employer-sponsored life insurance typically only covers the employee and not their spouse or children. If something happens to the employee, their spouse may be left without adequate financial protection. It is important to consider whether your employer's plan provides sufficient coverage for your spouse, or if you need to purchase a separate policy to ensure their financial security.

Inadequate for Long-Term Needs

The coverage provided by employer-sponsored life insurance may not be sufficient to meet your long-term financial needs. It is important to consider not just your current salary but also bonuses, commissions, second incomes, and the value of additional benefits such as medical insurance and retirement contributions. Additionally, if you have young children, you will need to replace more years of income compared to if your children are older.

In summary, while employer-sponsored life insurance can be a valuable benefit, it is important to recognize its limitations. Depending on your circumstances, you may need to purchase additional coverage or a separate policy to ensure that your loved ones are adequately protected.

Group life insurance taxes

Group term life insurance is a common employee benefit that covers not just the individual but their co-workers as well. It is often provided by employers at no cost, but employees may also have the option to purchase additional coverage through payroll deductions.

The first $50,000 of group term life insurance coverage is tax-free to the employee. According to Internal Revenue Service (IRS) Code Section 79, the cost of any coverage over $50,000 that is paid for by an employer must be recognized as a taxable benefit and reported on the employee's W-2 form as income. The taxable amount is calculated using an IRS premium table, based on the employee's age, and is subject to Social Security and Medicare taxes.

If an employer offers different amounts of coverage to select groups of employees, then the first $50,000 of coverage may become a taxable benefit for them. This includes corporate officers, highly compensated individuals, or owners with a 5% or greater stake in the business.

There can also be tax implications if employer-provided group term life insurance is offered for an employee's spouse or dependents. If the amount of coverage is $2,000 or less, it is not taxable to the employee. However, the premiums on coverage for spouses or dependents over that amount may be treated as taxable income for the employee. If coverage exceeds $2,000, then the entire amount of the premium is considered taxable.

The amount shown on an employee's paycheck or pay stub for group term life insurance represents the taxable benefit. At the end of the year, the employee will receive a W-2 form that reports the total cost of any group insurance that was in excess of $50,000 and is therefore taxable. This amount will appear in box 12c of the W-2 and will also be included in the employee's income for boxes 1, 3, and 5.

The IRS has a table in its "Publication 15-B: Employer's Tax Guide to Fringe Benefits," that employers can use to determine the cost of excess coverage, based on the worker's age. For example, if an employee is 45 years old, their premiums would be calculated at 15 cents per month (or $1.80 a year) for every $1,000 in coverage. The first $50,000 of coverage isn't taxed, so if they had $200,000 in total coverage, they would be taxed on the cost of $150,000 in coverage, or $270 for the full year.

It is important to note that group term life insurance coverage is linked to ongoing employment, and it automatically ends when an individual's employment is terminated. However, some insurance companies do offer the option to continue coverage by converting to an individual permanent life insurance policy, which may have a higher premium.

Frequently asked questions