Life Insurance: Understanding The Dependent Waive Option

Dependent life insurance is a type of insurance that provides a lump-sum payment, known as a death benefit, to the policyholder if a covered dependent, such as a spouse or child, passes away. It is often provided by employers as a benefit to employees and can also be purchased as a standalone policy or added to an existing policy. The benefit amount is chosen by the employer and is usually provided in conjunction with life insurance for the employee. The employee is the beneficiary and can use the benefit to cover funeral expenses and other costs associated with the loss of a dependent.

What is dependent life insurance?

Dependent life insurance is a type of life insurance that pays out a death benefit to the policyholder if a covered dependent, such as a spouse, domestic partner, or child, passes away during the policy term. These policies are designed to cover final expenses, such as funeral costs and travel to the funeral, so death benefit payouts tend to be smaller.

Dependent life insurance is typically obtained through an employer's group benefit plan, often referred to as voluntary dependent life insurance or voluntary group life insurance. It can also be added to an individual life insurance policy. This type of insurance is usually less expensive for children and more affordable for spouses due to older age and increased risk.

The specific qualifications for dependents vary depending on the insurance provider and the group plan. Generally, eligible dependents include:

• Spouse or domestic partner: The definition of a spouse is typically broad and includes anyone recognised as such by the state, including common-law spouses in some cases.
• Children: Biological children, stepchildren, legally adopted children, or children for whom the policyholder is a legal guardian. Children are usually covered until they reach a certain age, often 26, with potential exceptions for full-time students, children with disabilities, or other unique circumstances.
• Older parents: In some cases, older parents who are financially dependent on the policyholder and live with them may also qualify as dependents.

The amount of coverage provided by dependent life insurance policies differs, but they generally aim to cover funeral and burial expenses. Most group dependent life policies offer coverage in thousand-dollar increments, such as $4,000, $6,000, $8,000, and so on.

It is important to note that dependent life insurance policies often have limitations. For example, coverage may be lost if the policyholder leaves their job, and there may be restrictions on specific dependents, such as age limits for children. Additionally, the death benefit may be taxable under certain circumstances, depending on the amount of coverage and whether the employer pays part of the premiums.

Who can qualify as a dependent?

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. Family members who rely on your income may qualify as life insurance dependents. Here is a list of people you could name on your policy:

Spouse

The definition of a spouse for dependent life insurance purposes may vary but includes anyone the state recognizes as your spouse. For example, if your state recognizes common-law marriage and your relationship meets your state’s definition, your spouse may qualify as a dependent. A domestic partner may not be eligible for dependent life insurance, unless your plan also allows for coverage of other adult dependents.

Children

Any children for whom you are a legal guardian can qualify as dependents for dependent life insurance purposes. That includes biological children, adopted children, and stepchildren. Children are usually only considered dependents until a certain age, often 26, but this can vary by plan. In some cases, a full-time student, child with disabilities or other child uniquely dependent upon you may be covered for longer.

Other adult dependents

Other adult dependents, such as an older parent, may be eligible. But you'll need to read the terms of your plan to confirm this, because it's uncommon. Other eligible dependents typically need to live with you, be unmarried, and be directly financially dependent on you or interdependent with you.

Dependents of military members

The Servicemembers Group Life Insurance (SGLI) program offers military members dependent life insurance to cover their dependent spouses and children through Family Servicemembers’ Group Life Insurance (FSGLI). FSGLI offers a budget-friendly alternative to traditional group policies, helping military members choose cost-effective coverage for their dependents.

What are the pros and cons?

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. It is typically offered through workplace group plans in $2,000 increments and is designed to cover final expenses such as funeral costs and travel to the funeral.

Pros

• Financial protection for end-of-life expenses: This insurance can help cover end-of-life expenses for dependents, reducing financial stress during grieving.
• Cost-effective: These policies tend to be more affordable since they come in smaller amounts and are often available through group policies.
• Convenient to manage: Dependent life policies are often available through employers, making them easier to obtain and maintain.
• No medical exam: Dependent life insurance rarely requires a medical exam, potentially speeding up the application process.

Cons

• Limited coverage: Dependent life insurance has small death benefits to cover final expenses, so it may not be suitable for replacing substantial income.
• Limited accessibility: These policies are usually offered as part of workplace benefits plans, so they may be difficult to customise or access if self-employed or unemployed.
• Risk of losing coverage: As most of these policies are available through work, you may lose coverage if you change jobs or retire.

Is the death benefit taxable?

Dependent life insurance is a type of 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 is designed to cover final expenses, such as funeral costs and travel to the funeral, so death benefit payouts tend to be smaller.

Generally, life insurance proceeds are not considered part of the beneficiary's gross income and are therefore not subject to income or estate taxes. However, there are certain circumstances in which a death benefit can be taxed.

If the payout is structured as multiple payments, such as an annuity, the payments can be subject to taxes as they include proceeds and interest. Similarly, if the policyholder has withdrawn money or taken out a loan against the policy, and the amount withdrawn exceeds the total amount of premiums paid, the excess may be taxable.

In the case of an employer-paid group life plan, if the payout exceeds $50,000, it may be taxable according to the Internal Revenue Service (IRS). The IRS also states that if life insurance proceeds are included as part of the deceased's estate and, together with the rest of the estate, exceed the federal estate tax threshold ($12.92 million as of 2023), estate taxes must be paid on the proceeds over the allowed limit.

Dependent life insurance death benefits specifically may be taxable if your employer pays for coverage over $2,000 for a dependent. In this case, the full policy amount may be taxable as imputed income. However, if you pay all the premiums yourself or if your employer only pays for coverage up to or less than $2,000, the benefit is not taxable.

It is important to note that any interest received from life insurance proceeds is generally taxable and should be reported as interest received.

As situations vary, it is recommended to consult a tax professional for advice on your specific circumstances.

How does it work?

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. It is often provided by employers as part of a benefits plan or can be purchased as a standalone policy or an add-on to a traditional insurance policy.

Dependent life insurance policies typically limit coverage to the funeral and burial expenses of the insured dependent. The policyholder will receive a lump sum of money, with the average cost of a funeral and burial being $7,848 according to the National Funeral Directors Association. Policy limits usually fall within this range and are offered in increments of $1000, such as $4000, $6000, $8000, etc.

Dependent life insurance can be obtained for a spouse and/or unmarried children up to a specified age, often 26. Some plans may offer coverage for older dependents or disabled dependents who qualify for health and dental insurance. The employee is automatically designated as the beneficiary of the policy.

Dependent life insurance policies are typically offered through group life insurance plans, with coverage specifics varying by employer. These plans often provide coverage for multiple dependents, including spouses and children, with the spouse usually being the primary beneficiary. The definition of a spouse can vary but generally includes anyone recognised by state law as a spouse, including common-law spouses.

The amount of coverage available for dependent life insurance is usually significantly lower than that of an individual policy and is often limited to between 50% and 100% of the policyholder's own supplemental coverage. Coverage is offered in increments of a specific dollar amount, such as $2000 or $10,000, with the limits usually being higher for spouses than for children. The premiums for dependent coverage are automatically withheld from the policyholder's paycheck after taxes.

Dependent life insurance policies can also be purchased as a standalone policy or an add-on to a traditional insurance policy. In this case, the policyholder will likely have to pay a premium for coverage, and the dependent may have the option of term life insurance or permanent life insurance. Term life insurance offers temporary coverage, usually between ten and thirty years, while permanent life insurance provides lifelong coverage with a cash value component.

Conversion of Policies

While child life insurance policies typically cannot be converted, dependent life insurance policies for spouses often come with a conversion option. This allows the spouse to keep life insurance coverage if the policyholder retires, quits, is terminated from their job, or divorces the spouse. The policy can be converted to an individual life insurance policy, usually a permanent life insurance policy such as whole or universal life insurance.

Frequently asked questions