Understanding Basic Dependent Life Insurance: What You Need To Know

Basic dependent life insurance is a type of life insurance that pays a death benefit to the policyholder if a covered dependent, such as a spouse, domestic partner, or child, passes away during the policy term. It is typically obtained through an employer's group benefit plan but can also be purchased as a standalone policy or added to an existing traditional insurance policy. Dependent life insurance policies are designed to cover final expenses, such as funeral costs, and provide financial protection for end-of-life expenses, helping to relieve financial stress during grieving. The coverage amount is usually lower compared to individual policies and is offered in increments, with limits that vary depending on the dependent's relationship to the policyholder.

Who qualifies as a dependent?

Dependent life insurance is a type of insurance that pays a death benefit to the policyholder if a covered dependent, such as a spouse, domestic partner, or child, passes away during the policy term. It is often provided by employers or through joint life insurance policies.

The qualifications for dependent life insurance vary depending on the insurance company and the specific plan. However, some general guidelines include:

• Dependents that are children: Biological children, stepchildren, legally adopted children, and children under the legal guardianship of the policyholder typically qualify as dependents. The age limit for dependent children is usually 26, but some plans may offer coverage for older children with disabilities or unique needs.
• Dependents that are spouses: For dependent life insurance purposes, a spouse is typically defined broadly and includes anyone recognised by state law as a spouse, including common-law spouses. However, a domestic partner may not always be recognised as a qualifying spouse, depending on the specific group plan.
• Other adult dependents: Other adult dependents, such as elderly parents or domestic partners, may also qualify as dependents in some cases. They typically need to live with the policyholder, be unmarried, and be financially dependent on or interdependent with the policyholder.
• Dependents of military members: Family Servicemembers' Group Life Insurance (FSGLI) is a specific type of life insurance program designed for spouses and dependent children of military members insured under Servicemembers' Group Life Insurance (SGLI). This program offers coverage for spouses and children under 18, full-time students, or permanently and totally disabled. The maximum coverage limit per child is $10,000, while the maximum coverage for a spouse is $100,000.

It is important to carefully review the terms and conditions of a dependent life insurance policy to understand the specific qualifications and requirements for dependents.

How does it work?

Basic dependent life insurance is a type of life insurance that pays a death benefit to the policyholder if a covered dependent, such as a spouse or child, passes away during the policy term. This type of insurance can be purchased as a standalone policy or added to an existing policy. It is often provided by employers as part of their benefits package, but can also be purchased privately.

Dependent life insurance policies typically cover funeral and burial expenses for the insured dependent. The policy limit usually falls within the range of these expenses, which, according to the National Funeral Directors Association, average around $7,848. Most group dependent life policies offer limits in thousand-dollar increments, such as $4,000, $6,000, $8,000, and so on.

There are usually limits on how specific dependents are covered. For example, dependent coverage for children is often only offered until they reach a set age, typically 26, similar to the eligibility specifications for including a child on health insurance. In some cases, a full-time student, child with disabilities, or a child with unique circumstances may be covered beyond this age limit.

Dependent life insurance for spouses usually includes anyone recognised by state law as a spouse, including common-law spouses. However, a domestic partner may not always be recognised as a qualifying spouse, depending on the language of the specific group plan.

Dependent life insurance policies can be either term life insurance or permanent life insurance. Term life insurance offers temporary coverage, usually between ten and thirty years. If the dependent passes away during the term, the policyholder receives a death benefit. If the dependent outlives the policy, no benefit is paid. Permanent life insurance, on the other hand, provides lifelong coverage and includes a cash value component, allowing the policyholder to earn interest on a portion of the premiums. When the dependent passes away, the beneficiary receives the death benefit plus the cash value earnings on the policy.

Employers typically only carry term life insurance for dependents, and customisation options are often limited. Therefore, those seeking a permanent policy or more tailored coverage may need to consider a private insurer.

Dependent life insurance is often available as part of a benefits plan through employers, who usually designate the employee as the beneficiary. Similar to health insurance, group and dependent life insurance can typically only be purchased during open enrollment or after qualifying events such as being hired or getting married. The coverage may not begin immediately and may be subject to a waiting period.

The cost of dependent life insurance varies depending on the number of dependents covered, their ages, and the amount of coverage. Employers usually deduct the premiums for dependent coverage directly from the employee's paycheck.

Coverage options

Dependent life insurance is often provided by employers or through joint life insurance policies. It can also be purchased as a standalone policy or an add-on to a traditional insurance policy. Coverage specifics vary by employer, so it is important to speak with the relevant department, usually Human Resources, to understand the specific options available to you.

Employer-Sponsored Dependent Insurance

Employer-sponsored dependent insurance is typically offered as part of a group life insurance benefits package. This type of insurance usually covers multiple dependents, including spouses and children, although specific policies will vary by employer. Coverage amounts are generally lower for dependent coverage than for an individual policy and are offered in increments of a specific dollar amount, such as $2,000 or $10,000. The maximum coverage per eligible dependent is usually specified in the plan, with limits typically higher for spouses than for children.

For children, employer-sponsored insurance usually provides a small death benefit to cover end-of-life costs, ranging from $5,000 to $20,000. On the other hand, death benefits for spouses tend to be significantly higher to account for end-of-life expenses, income replacement, or other costs associated with their loss. One advantage of choosing group life insurance is that it is often offered to all employees, and dependents may not be required to undergo a medical exam, making it a good option for those with pre-existing conditions. However, it's important to note that this type of coverage usually does not continue if you leave your job.

Traditional Life Insurance Policy

A non-income-earning partner can also have their own traditional life insurance policy, either term or permanent. However, they will likely need to undergo a medical exam for coverage. If health concerns are a factor, consider exploring no-medical-exam policies.

Joint Life Insurance Policy

A joint life insurance policy provides coverage for both you and your spouse. It is typically more cost-effective than purchasing two separate policies and comes in two types: first-to-die and second-to-die, or survivorship life insurance. With a first-to-die policy, the surviving spouse receives a death benefit when the first spouse dies, but coverage does not extend beyond that. In contrast, a second-to-die policy provides a death benefit to beneficiaries when both spouses have passed away, helping them pay for costs associated with the transfer of wealth, such as estate taxes or probate fees.

Whole Life Insurance for Children

Whole life insurance for children is a standalone policy that offers lifelong coverage for your child. When they pass away, you or another designated beneficiary will receive the proceeds from the policy. One key benefit of this type of insurance is that it locks in your child's insurability, ensuring coverage even if they develop genetic conditions that might otherwise affect their ability to qualify for insurance later in life.

Term Riders on Parent Policies

Another option for insuring your children is through a child term rider added to your insurance policy for an additional fee. This option is often more cost-effective than a standalone policy and provides coverage for all your children, including future ones. These riders are usually convertible, allowing your child to convert them to a permanent life policy with a cash value component when they become adults.

Benefits

Basic dependent life insurance is a type of life insurance that pays a death benefit to the policyholder if a covered dependent, such as a spouse or child, passes away during the policy term. Here are some of the benefits of this type of insurance:

Financial Protection for End-of-Life Expenses

Dependent life insurance can help cover the financial burden of end-of-life expenses, such as funeral and burial costs, which can average around $7,848 for a funeral with a viewing and burial. This can provide peace of mind and relieve financial stress during a difficult time.

Cost-Effectiveness

Dependent life insurance policies tend to be more cost-effective than traditional life insurance policies because they are offered in smaller amounts and are often available through group policies. The cost of dependent life insurance for children is typically lower than that of a spouse due to the lower risk associated with younger ages.

Convenience

Dependent life insurance policies are often available through employers, making them convenient to obtain and maintain. Additionally, premiums can be automatically deducted from your paycheck, and there is usually no need for a medical exam for dependents.

Coverage for Non-Income-Earning Spouses

Dependent life insurance can provide financial protection for non-income-earning spouses, helping to cover the costs of losing their contributions to the household. This includes expenses such as childcare, home upkeep, and other services that would need to be replaced.

Conversion Options

Dependent life insurance policies for spouses may offer conversion options in certain circumstances, such as retirement, termination of employment, or divorce. This allows the spouse to continue their life insurance coverage without having to establish insurability through a medical exam.

Tax implications

Dependent life insurance is a type of life insurance that pays a death benefit to the policyholder if a covered dependent, such as a spouse or child, passes away during the policy term. The death benefit is typically not taxable if the policyholder pays all the premiums. However, if the employer pays for part of the coverage, the benefit may be taxable depending on the amount. If the coverage for a dependent exceeds $2,000, the full policy amount may be taxable as imputed income. The Internal Revenue Service (IRS) considers amounts over the $2,000 cutoff as taxable income and provides tables to calculate the taxes due based on factors like the age of the insured dependent.

According to the IRS, the first $50,000 of group-term life insurance coverage provided by an employer is excluded from taxation. However, if the total amount of coverage exceeds $50,000, the imputed cost of coverage in excess of $50,000 must be included in income and is subject to Social Security and Medicare taxes. This also applies when the employer subsidizes the cost of coverage for employees, creating a taxable fringe benefit.

The cost of employer-provided group-term life insurance on an employee's spouse or dependent is not taxable to the employee if the face amount of coverage does not exceed $2,000. This is considered a de minimis fringe benefit. However, if the coverage exceeds $2,000, the excess amount may be taxable, and the same Premium Table used for employees is applied to calculate the taxable portion.

It is important to note that tax laws and regulations can vary, and individuals should consult their financial or tax advisor to understand the specific tax implications of their dependent life insurance policies.

Frequently asked questions