Coverage and Tax Considerations for Work-Sponsored Life Insurance
While employers have cut back on pensions and their 401(k) plans do not offer the same level of retirement income security, they have stepped up in the area of life insurance. The majority of Americans (68 percent) have a life insurance policy through their employer. In fact, for the first time in history, more people get life insurance through work rather than purchasing a policy on the market.
Most employers offer term life insurance typically at a coverage rate of anywhere from one-to-three times a worker’s annual salary. Term life policies lock in a fixed rate for a specific period of time, usually from 10 to 30 years. One of the biggest perks of getting life insurance through work is that it is generally a guaranteed issue. Purchasing life insurance on the individual market often requires a multitude of forms, a physical, and medical underwriting. Medical underwriting can trigger a higher premium or cause your application to be rejected altogether.
Employers also might offer workers the opportunity to augment their insurance coverage for an additional fee. Some of the perks that come with this type of policy include:
- Lower premiums than policies purchased on the individual market
- Portability – the ability to retain the policy if you change jobs
- Enhanced plan options, such as an additional income payout if you suffer a severe or catastrophic disability and/or premium waivers
Even a small life insurance policy can cover initial expenses after a loved one’s death, such as paying for the funeral, mortgage/rent, car payments, loans, and everyday bills. Life insurance can also provide income until the beneficiary finds a way to replace the deceased’s salary.
For the worker, there are no tax consequences for an employer-sponsored life insurance policy with up to $50,000 worth of coverage. For amounts over that, the worker is liable for the portion of the premium paid for by the employer that represents the coverage amount above $50,000. In other words, the premium for additional coverage is considered taxable income.
For workers who believe they need more coverage than the standard amount provided through their benefits package, there are a couple of options. The first is to buy extra coverage through the employer’s voluntary benefits program, if available. Note that this is usually limited to additional term coverage.
Alternatively, an employee can buy coverage on the individual market, which offers more options. Specifically, the employee can supplement standard term life coverage with a whole life policy. Whole life coverage remains in effect throughout the policyholder’s lifetime – as long as the policyholder continues making premium payments. Whole life can offer a variety of additional features, such as investment options and a cash value account from which money can be borrowed if needed.
The policy owner can get back some of the money paid into the policy if at some point the decision is made to no longer maintain the policy. Be aware, however, that whole life coverage may cost as much as three-to-five times more than a term life policy on the individual market.