Employee Life Insurance: Worth The Cost?

Life insurance is a popular employee benefit, with more than half of private companies offering policies. It's a valuable and attractive benefit, but it may not be enough to meet your needs.

Employee life insurance is usually a one-size-fits-all policy, often based on a multiple of your salary. While it can provide a degree of financial security, it's important to consider whether the coverage is sufficient, especially if you have dependents or other financial commitments.

There are several advantages and disadvantages to enrolling in your employer's life insurance plan, and it's essential to weigh these before making a decision.

Pros of employee life insurance

There are several advantages to employee life insurance. Here are some pros of employee life insurance:

Convenience and ease of enrollment

Employee life insurance streamlines the process of getting life insurance. You don't have to worry about finding a provider or going through a lengthy application process. During open enrollment or new employee onboarding, you can opt into your employer's life insurance coverage by answering a few simple questions. This convenience makes it more accessible for individuals to get the financial protection they need.

Savings and lower premiums

Employee life insurance is often provided at a low cost or even free of charge to the employee. Employers usually pay for all or most of the premiums, allowing employees to save money or allocate their funds to other essential needs. The group rates offered by employers are typically more affordable than comparable individual policies.

Simple qualification and acceptance

Employee life insurance plans generally do not require a medical exam for qualification. This is especially beneficial for older individuals or those with pre-existing health conditions who might struggle to get approved for individual policies or would have to pay higher rates. Most employee life insurance plans are guaranteed, meaning you will be accepted regardless of any serious medical conditions.

Early protection and added coverage

Employee life insurance can provide financial security for those who are just starting their careers or don't yet have the funds to purchase an individual policy. It can be particularly valuable for young individuals with dependents who rely on their income. Additionally, employee life insurance often allows for increased coverage as life events and needs change. Employers may offer the option to pay an additional premium to enhance protection.

Riders for extra protection

Employers may also offer riders, such as those for specific degrees of illness and disability, which employees can purchase for added protection. These riders provide further customization and ensure that employees can address their unique financial needs and situations.

Cons of employee life insurance

• It may not be enough coverage: Basic employer-provided life insurance is usually low-cost or free, and you may be able to buy additional coverage at low rates, but the policy's coverage may not meet your needs. Many employers provide employees with about $50,000 to $100,000 worth of coverage, or about a year's salary. However, if you have dependents who rely on your income, you may require additional coverage to provide for their needs in the event of your death. Some experts recommend getting coverage worth five to ten times your salary.
• You can lose your coverage if your job situation changes: As with health insurance, you want to avoid gaps in your life insurance coverage. If you change jobs, are laid off, or are reduced to part-time status, you could lose your employer-provided life insurance. Some policies do allow you to convert your group policy to an individual one, but it will likely be more expensive.
• Getting coverage becomes more difficult when your health declines: If you're leaving your job because of a health problem or if your health has declined, you may struggle to get new insurance because insurers factor in your health when they approve you for a policy. A medical exam is a standard part of the process of applying for most life insurance policies.
• Your plan may not provide enough coverage for your spouse: Your employer's benefits package may not provide life insurance for your spouse, or the coverage may be minimal. It's important to note that families can often suffer economic hardship if either spouse dies, not just the primary breadwinner. However, in many cases, employer-provided insurance does not adequately insure the spouse of the employee.
• Employer-provided life insurance may not be your cheapest option: Even if you feel that the life insurance coverage from your employer is sufficient, consider shopping around to see if your employer's insurance offers the best value. The younger and healthier you are, the more likely you will be to find a better rate elsewhere. The coverage provided by employers tends to get more expensive as you age. In contrast, you can purchase guaranteed level-premium term life insurance that costs the same amount every year for as long as you have the policy.

Employee life insurance and taxes

Employee life insurance is a valuable benefit offered by employers. However, it's important to understand the tax implications, as they can vary depending on the cost and type of coverage.

Tax Implications of Employee Life Insurance

The Internal Revenue Service (IRS) considers employer-paid life insurance as income, which means employees are subject to taxes on the premium paid above a certain threshold. This threshold is currently set at $50,000 in the United States. If your employer provides life insurance with a coverage amount exceeding $50,000, the additional premium cost is treated as taxable income and must be included in your taxable wages. This is true even if the employer's actual cost is lower than the amount determined by the IRS tables.

For example, if your employer provides you with a $100,000 life insurance policy, you will be taxed on the premium cost for coverage above $50,000. The taxable amount will be based on IRS tables and may result in "phantom income," where you are taxed on income you never actually received. This tax liability increases with age and compensation level.

Group Life Insurance and Taxes

Group life insurance is a common type of employee life insurance that is typically offered as a term life insurance policy. While it provides a valuable benefit to employees, the coverage amount is usually a base figure, such as $50,000, or an amount equal to your annual salary. This may not be sufficient for everyone, especially if you have dependents or other financial responsibilities. Additionally, group life insurance is often tied to your job, and you may lose the coverage if you leave your current employer.

Supplemental Employee Life Insurance

To address the limitations of basic group life insurance, many employees choose to purchase supplemental coverage through their employer's plan or from an external insurer. Supplemental insurance can provide additional protection and allow for customization based on your specific needs. However, even with supplemental coverage, the total amount of employer-provided life insurance may not be enough, and you may still need to consider an individual policy.

Individual Life Insurance

Individual life insurance policies are purchased directly by individuals from an insurer. These policies are more customizable and offer greater flexibility in terms of coverage amounts and features. Individual policies are not tied to your employment, so you can retain the coverage even if you change jobs. Additionally, permanent individual life insurance policies, such as whole life insurance, can build cash value over time, providing a source of funds for specific needs like a down payment on a home or education expenses.

Tax Considerations for Individual Life Insurance

Unlike group life insurance, individual life insurance policies may require a medical exam and have more stringent health requirements for eligibility. Premiums for individual policies are typically higher than group policies, especially for older individuals or those in poor health. However, individual life insurance premiums are generally not subject to sales tax, and the interest generated from whole life insurance policies is not taxed until the policy is cashed out.

In conclusion, while employee life insurance can be a valuable benefit, it's important to consider the tax implications and ensure that the coverage meets your unique needs. Supplemental or individual policies may be necessary to achieve adequate protection for yourself and your loved ones.

Employee life insurance and dependents

Employee life insurance is a valuable benefit that can provide peace of mind and financial protection for individuals and their families. However, it is important to understand the limitations of this coverage, especially when it comes to dependents.

Understanding Employee Life Insurance

Employee life insurance, often referred to as group life insurance, is a type of insurance offered by employers to their employees. It is typically provided as term life insurance, which means it remains in effect for a certain period, such as 30 years. While this type of insurance can be a great perk, it may not offer sufficient coverage for everyone, and it is usually tied to your job, meaning you may lose the coverage if you leave your current employer.

Dependents are often eligible for coverage under employee life insurance plans. This includes spouses (by marriage or common-law) and children under a specified age, typically up to age 19 or 21. In some cases, older dependents with disabilities or those who are full-time students may also qualify for coverage.

The coverage for dependents is usually provided in conjunction with the employee's life insurance policy. The employee is automatically designated as the beneficiary, so in the event of the death of a dependent, the employee receives the policy's face value as the death benefit.

Limitations and Considerations

While employee life insurance for dependents can be beneficial, there are some limitations to consider. Firstly, the amount of coverage available for dependents is typically significantly lower than that of an individual policy. Additionally, dependent coverage may not begin immediately and is usually only available during open enrollment or after qualifying events, such as getting married.

Furthermore, dependent life insurance coverage is often tied to the employee's job, similar to the employee's own life insurance. This means that if the employee leaves their current employer, the dependent coverage may be affected or discontinued.

Customization and Supplemental Coverage

It is important to note that employee life insurance, including dependent coverage, may not be customizable to your specific needs. To ensure adequate protection, individuals may consider purchasing supplemental coverage through their employer's plan or obtaining a separate individual policy. This additional coverage can provide peace of mind and ensure that your loved ones, including dependents, are sufficiently protected.

In conclusion, while employee life insurance and dependent coverage can be valuable benefits, it is important to carefully consider your unique situation and needs. Supplemental coverage or an individual policy may be worth considering to ensure adequate protection for yourself and your dependents.

Employee life insurance and alternative options

Employee life insurance is a valuable benefit offered by many employers. However, it is important to understand its limitations and explore alternative options to ensure adequate financial protection.

Employee Life Insurance

Employee life insurance, also known as group life insurance, is typically offered as a term life insurance policy. It provides employees with a death benefit, which is usually based on a multiple of their annual salary or linked to their position in the company. Most often, employers pay all or most of the premiums, making it a convenient and cost-effective option for employees. Enrollment is often simple, and group life insurance plans generally do not require a medical exam, making them accessible to individuals with pre-existing health conditions.

However, employee life insurance has several limitations. Firstly, the coverage amount may not be sufficient, especially for those with dependents, mortgages, or other financial responsibilities. Secondly, it is tied to your employment, meaning that if you leave your job, your coverage will likely end. Additionally, employee life insurance usually lacks customization options and may not allow you to purchase the desired level of protection.

Alternative Options

Supplemental Employee Life Insurance

If your employer offers supplemental life insurance, you can enhance your coverage beyond the basic plan. Supplemental employee life insurance allows you to increase your protection, providing additional financial security for your dependents and addressing specific financial needs.

Individual Life Insurance

Purchasing an individual life insurance policy is a recommended alternative or supplement to employee life insurance. An individual policy offers several advantages, including:

• Customization: You can tailor the policy to your specific needs, selecting features and riders that align with your future goals.
• Portability: An individual policy is not tied to your employment, so you can retain your coverage even if you change jobs.
• Higher coverage: Individual policies can provide higher coverage amounts, ensuring your dependents' financial needs are met.
• Permanent coverage: While most employee life insurance is term coverage, individual policies can offer permanent coverage, such as whole life or universal life insurance, which remains in effect for your lifetime and may include a cash value component.

When considering individual life insurance, it is important to shop around and compare rates from different insurers. Additionally, keep in mind that individual policies may require a medical exam, and the premiums may increase as you age.

Frequently asked questions