Life Insurance: What Employers Offer Permanently To Employees?

Life insurance is a popular employee benefit, with many employers offering it to their staff at a subsidised rate or for free. This type of insurance is known as 'group life insurance' and is distinct from permanent life insurance. While it can be a convenient way to get coverage, it is usually tied to your employment, meaning you may lose it if you leave your job. It also tends to offer limited coverage, which may not be sufficient for your needs.

Pros of employer-provided life insurance

There are several pros to employer-provided life insurance. Here are some key advantages:

Convenience

Opting for employer-provided life insurance is a straightforward process. Employees can usually access coverage by simply filling out the necessary forms provided by the company's HR department. This is often a seamless part of the onboarding process for new hires.

Savings

Employer-provided life insurance is typically offered as part of a benefits package, with employers covering most or all of the premium costs. This means employees can save money or allocate their income to other needs.

Acceptance

Most employer-provided life insurance plans are guaranteed, meaning employees are accepted regardless of any serious medical conditions they may have. This is especially beneficial for those who may struggle to obtain coverage on the individual market due to health issues.

Early Protection

For those who are early in their careers or just starting out, employer-provided life insurance offers a valuable safety net. It provides a degree of financial security for those who depend on the employee's income, which can be crucial when personal funds are limited.

Added Coverage

As life events and needs change, employees often have the option to increase their coverage. Employers may offer the choice to pay an additional premium to enhance the basic protection provided. This flexibility ensures that the insurance can adapt to an individual's evolving circumstances.

Riders for Extra Protection

Employers may also offer riders, which are additional features or benefits that can be added to the basic policy for further protection. These riders can provide coverage for specific situations, such as certain degrees of illness or disability.

Cons of employer-provided life insurance

While employer-provided life insurance can be a convenient option, there are several potential disadvantages to consider:

• Coverage is tied to your job: Group life insurance policies are often not portable, meaning that if you leave your job, you may lose your insurance. This can be a significant disadvantage, as most people do not stay with the same employer for their entire career. When you leave your job, you may have to purchase a new individual policy, which can be more expensive, especially if your health has declined.
• Limited choice: With employer-provided insurance, you generally cannot choose the insurance company or the type of policy. This lack of choice can be problematic if you want a different type of policy, such as whole life insurance, or if you prefer a different insurance company.
• Service is limited: While your HR department can answer many of your questions, they may not be able to provide the same level of personalized service as an independent insurance agent. An independent agent can offer more tailored advice and get to know your insurance needs better over time.
• Inadequate coverage: Most employer-provided policies offer a flat amount or a multiple of your income, which may not be sufficient for your needs, especially if you have a mortgage, spouse, or dependents. Experts generally recommend having life insurance coverage worth five to ten times your annual salary.
• Premiums are not fixed: The premiums for group life insurance tend to increase over time, either annually or every five years. This can lead to higher costs in the long run.
• Spouse and children are not covered: Employer-provided life insurance typically only covers the employee, not their spouse or children. Therefore, you may need to purchase additional coverage to ensure your family is adequately protected.
• May not be the cheapest option: While employer-provided insurance can be inexpensive, especially for younger and healthier individuals, it may not always be the most cost-effective option. Individual policies can often provide better value, especially if you are healthy and a non-smoker.

In summary, while employer-provided life insurance can be a convenient and affordable option, it is important to consider the potential drawbacks and ensure that you have sufficient coverage to meet your financial needs.

How much life insurance is the right amount?

Most group-term policies offer either a set amount of insurance (e.g. a $10,000 policy for each employee) or are based on the employee's salary (e.g. policy values of one, two, or three times the employee's yearly salary). Some employers allow employees to purchase life insurance in increments, with the cost based on their age.

There are several methods to calculate the ideal amount of coverage. Here are some of the most common:

• Multiply your income by 10: Financial experts often recommend purchasing at least 10 times your annual income in coverage. However, this method doesn't take into account your savings or existing life insurance policies.
• Multiply your income by 10, and add $100,000 per child for college expenses: This formula adds an additional layer to the previous method by including coverage for your child's education.
• Years-Until-Retirement Method: This method involves multiplying your annual salary by the number of years left until retirement. For example, if you are 40 years old and make $20,000 a year, you would need $500,000 in life insurance to reach the age of 65.
• Standard-of-Living Method: This method is based on the amount of money your survivors would need to maintain their standard of living if you die. For example, if you are between 41-50 years old, you multiply your annual salary by 20. If you are between 51-60 years old, you multiply it by 15. The idea is that survivors can withdraw 5% of the death benefit each year while investing the principal and earning 5% or more.
• Debt, Income, Mortgage, Education (DIME) Method: This method is intended to provide a minimal amount of coverage that will cover essential family expenses in the event of an untimely death. It takes into account your outstanding debts (including your mortgage), the cost of your children's education, and the replacement of your income until your children turn 18.

When deciding on the right amount of life insurance, it's important to consider your financial goals and needs. If you have dependents or significant financial obligations, you will likely need more coverage. On the other hand, if you have no dependents and sufficient assets to cover your debts and final expenses, you may not need life insurance at all.

How to decide if group life insurance is for you

Group life insurance is a common employee benefit, but how do you know if it's right for you? Here are some things to consider:

Convenience and cost

The convenience of group life insurance is a big plus. It's often part of your hiring documents, and HR departments are usually on hand to answer any questions. Basic coverage is usually free or low cost, and there's no medical exam required to qualify. However, if you want to buy supplemental life insurance, you may need to provide information about your health.

Coverage

While group life insurance is a good "work perk", it might not be sufficient for your needs. Coverage amounts are typically capped at low amounts, such as one to two times your annual salary. If you have dependents or financial obligations, a group life insurance policy could leave you underinsured. It's important to calculate how much life insurance you need and compare that to the coverage offered by your employer.

Portability

Group life insurance is often not portable, meaning 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 an individual life insurance policy, but the price could go up significantly.

Choice

Coverage through work tends to be term life insurance, and employers usually only work with one carrier, so you won't have a range of policy options. If you're looking for a more complex product like whole life insurance or universal life insurance, you might want to compare prices on the open market first and speak with a fee-only life insurance advisor.

Premiums

The premiums for group life insurance are usually paid by the employer, but if your employer pays for coverage over $50,000, the premiums for coverage over that amount may be subject to income tax. Premiums for group life insurance also tend to increase annually or every five years.

Dependents

Group life insurance only covers the employee, not their spouse or children. If you want to add coverage for a spouse or dependent, you may be able to do so through your workplace benefits.

In summary, group life insurance can be a good option if you don't have any other life insurance coverage, especially if you don't have any health issues that would prevent you from qualifying for an individual policy. However, it's important to keep in mind that group life insurance may not provide enough coverage, and you could lose that coverage if you leave your job.

What are the tax implications of employer-paid life insurance?

Employer-paid life insurance is considered income by the IRS, and as such, it is taxed accordingly. However, this only applies when the insurance coverage exceeds $50,000. The premium cost for the first $50,000 in coverage is exempt from taxation.

If an employer provides an employee with $50,000 in life insurance coverage, in addition to their salary and other benefits, the employee doesn't have to pay taxes on the life insurance benefit because it does not exceed the threshold set by the IRS. However, if an employer pays for a $100,000 life insurance policy, the employee must pay taxes on part of that amount. The taxable amount is based on IRS tables, regardless of the actual premium paid.

For example, a 70-year-old receiving $50,000 in insurance coverage above the threshold is considered to have $103 per month in additional taxable income, or $1,236 per year. This is called "phantom income" because, while you didn't actually receive the money, you are taxed as if you did. This amount is included in the taxable wages reported on your Form W-2.

The cost of group term life insurance is set by a table prepared by the IRS. Even if your employer's actual cost is lower than what's listed on the table, your taxable income is determined by the one pre-established in the table. As a result, older employees may find themselves taxed on an amount that is higher than what they would pay for similar coverage under an individual term policy.

If you are concerned about the tax cost of employer-provided group term life insurance, you should first check if this is the case by looking at Box 12 of your W-2 (with code "C"). If a specific dollar amount appears, that is your employer's cost of providing you with group term life insurance coverage in excess of $50,000, less any amount you paid for the coverage. You are responsible for federal, state, and local taxes on this amount, as well as associated Social Security and Medicare taxes.

If you decide that the tax cost is too high for the benefit you're getting, you can ask your employer about a "carve-out" plan, which excludes selected employees from group term coverage. Your employer could continue providing you with $50,000 of group term insurance (which won't count towards your taxable income) and then provide you with an individual policy for the rest of the coverage. Alternatively, your employer could give you the funds they would have spent on the excess coverage as a cash bonus, which you could then use to pay the premium for an individual policy.

Frequently asked questions