Life Insurance: A Job Perk You Need?

Life insurance is a type of insurance that pays out a sum of money to your beneficiaries after you die. Many employers offer life insurance as a workplace benefit, and it is referred to as basic group life insurance. This type of insurance is typically term life insurance, which is only in effect for a specific length of time, often tied to the duration of one's employment. While it can be a convenient and cost-effective option, there are also some drawbacks to consider, such as limited coverage amounts and the potential loss of coverage if one changes jobs.

Pros and cons of job-provided life insurance

Pros:

• It's free or low-cost: Basic coverage is usually included in employee benefits packages, with employers paying most or all of the premiums.
• It's convenient: Opting in is simple, as the paperwork is often part of your hiring documents, and HR departments are on hand to answer questions.
• Guaranteed acceptance: Most basic plans are guaranteed, so even those with serious medical conditions can qualify.
• Early protection: For those starting out in their career, job-provided life insurance can offer financial security for dependents when funds are otherwise limited.

Cons:

• Coverage is tied to your job: If you leave your job, you may lose your insurance, and converting a group policy to an individual one can be expensive.
• Limited choice: Coverage is usually term life insurance, and employers typically work with a single carrier, so you won't find the same range of options as on the open market.
• Low coverage amounts: Basic coverage is typically capped at one to two times your annual salary, which may not be sufficient if you have dependents or financial obligations.
• Premiums aren't fixed: Group life insurance premiums tend to increase annually or every five years.

How much life insurance do you need?

Many employers offer life insurance as a workplace perk, and they may subsidise some or all of the benefits. This is known as "group life insurance". Coverage amounts are typically capped at low amounts, such as one to two times your annual salary.

Since this amount is often insufficient, many people opt to buy additional insurance, known as "supplemental life insurance", through their workplace plans. However, the amount of coverage available varies among companies, and it may be more cost-efficient to find a policy outside of your employer's plan.

So, how much life insurance do you need?

In general, you should aim to buy enough life insurance to cover your obligations after you're gone. This can be calculated by adding up your long-term financial obligations, such as mortgage payments or college fees, and then subtracting your assets. The remainder is the gap that life insurance will have to fill.

There are multiple formulas to help you calculate your life insurance needs, including:

• Multiply your income by 10: This guideline is often shared online, but it doesn’t take a detailed look at your family’s needs, nor does it account for your savings or existing life insurance policies.
• Multiply your income by 10, plus $100,000 per child for college expenses: This formula adds another layer to the previous rule by including additional coverage for your child’s education.
• The DIME formula: This formula stands for Debt, Income, Mortgage, and Education. It encourages you to take a more detailed look at your finances and add up these four areas to get a more well-rounded view of your needs.
• Replace your income, plus add a cushion: With this method, you’ll buy enough coverage that your beneficiaries can replace your income without spending the payout itself. They can save or invest the lump sum and use the resulting income to pay expenses.

Other factors to consider when calculating your life insurance needs include your age, financial goals, family situation, and any existing savings or insurance policies.

Remember, the amount of life insurance you need is unique to your financial situation and obligations. It's important to do your research and consider multiple factors before deciding on a coverage amount.

Employer-provided life insurance and your spouse

Many employers offer life insurance as a workplace perk, often subsidising some or all of the benefits. These employer-provided life insurance policies are sometimes referred to as "basic group life". Coverage amounts are typically capped at low amounts, such as one to two times your annual salary. For example, if your salary is $50,000 per year, your employer might provide a group policy with a life insurance face amount of $50,000 or $100,000.

The coverage is generally guaranteed issue, meaning you don't need to take a life insurance medical exam or answer health questions to qualify. Since employers usually cover premiums and you won't be declined for coverage, there's no reason not to sign up for group life insurance.

However, employer-provided life insurance is usually only available to the employee, not their spouse or children. If your employer-provided insurance does cover your spouse, the coverage may be minimal. It's important to check the policy limits and decide if the death benefit is enough to help your spouse pay for your burial, cover existing debt and pay future bills. If not, you might want to consider purchasing a separate policy or buying additional coverage through your group plan.

While basic employer-provided life insurance is usually low-cost or free, your policy's coverage may not be enough to meet your needs, especially if you have a non-working spouse, a large mortgage, a large family, or special-needs dependents. Many employers provide employees with about $50,000 to $100,000 worth of coverage, or about a year's salary. Some experts recommend getting coverage worth five to ten times your salary.

If you decide to buy additional coverage through your group plan, you pay the premium for this supplemental coverage, usually through payroll deduction. Typically, your premiums will increase as you get older.

Permanent vs term life insurance

Many employers offer life insurance as a workplace perk, often subsidising some or all of the benefits. This is known as "group life insurance". Coverage amounts are typically capped at low amounts, such as one to two times your annual salary.

Group life insurance is often term life insurance, which is temporary and usually has level premiums. It is typically cheaper than permanent life insurance, which lasts your whole life and usually carries a cash value component that can be tapped into if needed.

Term life insurance

Term life insurance is temporary and lasts for a specific amount of time, typically between one and 30 years, or until a particular age. It tends to be more affordable than permanent life insurance, making it a convenient way to get coverage for a specific need or time period. Some policies can be converted to permanent life insurance at the end of the term. However, once the policy term ends, so does your coverage, and the policies do not carry cash value. Premiums can also get more expensive as you age.

Permanent life insurance

Permanent life insurance lasts for as long as you live, provided you stay current on premium payments. It is more expensive than term life insurance but allows you to access the cash value of your policy for expenses while you're alive. This cash value component grows tax-deferred, but any funds you withdraw reduce the death benefit, and you may be charged interest when you borrow cash from your policy.

Tax implications of job-provided life insurance

Life insurance provided by an employer is typically "group insurance", with one policy covering all employees. This type of insurance is often included in an employee's benefits package, with some or all of the premium costs paid by the employer. While this can be a convenient and cost-effective way to obtain life insurance, there are potential tax implications to consider.

The first $50,000 of group term life insurance coverage provided by an employer is generally excluded from taxable income and does not impact an employee's income tax bill. However, if the coverage exceeds $50,000, the additional amount becomes taxable income for the employee. This is known as "phantom income" and is included in the taxable wages reported on Form W-2. The cost of group term life insurance is determined by a table prepared by the IRS, and this predetermined amount may be higher than the employer's actual cost. As a result, older employees may find themselves paying higher taxes on this phantom income compared to the cost of similar coverage under an individual term policy.

To determine if the cost of employer-provided group term life insurance is impacting your taxes, check Box 12 of your W-2 form. If a specific dollar amount appears with the code "C", this represents the employer's cost of providing coverage above $50,000, minus any amount you contributed. This amount is subject to local, state, and federal taxes, as well as Social Security and Medicare taxes. It is important to note that this amount is already included in the total "Wages, tips, and other compensation" in Box 1 of the W-2 form and will be reported on your tax return.

If you find that the tax cost of employer-provided life insurance is higher than the benefits received, you may want to explore alternative options. One option is to ask your employer about a "carve-out" plan, which excludes selected employees from group term coverage. If such a plan is not available, the employer may be willing to create one. Under a carve-out plan, the employer can continue to provide $50,000 of group term insurance (which is tax-free) and offer an individual policy for the remaining coverage. Alternatively, the employer can provide the funds intended for excess coverage as a cash bonus, which the employee can then use to pay the premium for an individual policy.

Frequently asked questions