Should You Get Life Insurance Through Your Employer? (2024)

FAQs

Should You Get Life Insurance Through Your Employer? ›

Based on your family's financial goals and obligations, you may find that you need more life insurance than you can get through your employer. Review your options to determine if it offers the level of coverage you need to protect your family and provide them with the financial support they would need if they lost you.

Relying only on life insurance through your employer could put your family at risk if something happens to you and the coverage is not enough. Buying an individual policy in addition to your company life insurance can be a smart way to ensure the financial protection you need.

Consumers often purchase supplemental insurance through their employers. One advantage of doing so is that the employee bypasses the medical exam that a private insurer would require. However, employer-sponsored additional insurance may have limitations, so it is essential to research the coverage carefully.

Coverage is tied to your employment

Employer-paid life insurance plans typically end when the employee leaves the company. You can always search for an independent plan if this happens, but the quotes you receive then may be higher than they would be now. That's because life insurance costs vary by age.

The average amount of basic life insurance was similar for workers in medium and large and small private establishments ($15,481 and $15,935, respectively); for State and local government workers, the average was $17,518.

Your financial obligations, current lifestyle and long-term plans will likely play important roles in determining what kind of coverage you obtain. If you can fit the monthly premium into your budget, your 20s are the best time to buy affordable term life insurance coverage.

If you're fired or leave your job, your employer-provided life insurance will end, unless you have the option to port your coverage. When exactly your coverage ends will depend on the terms of your employer's benefits. It's often on your last day of employment or the last day of the month that you leave.

The drawbacks of employer life insurance

One drawback to employer life insurance is that your maximum policy value may not be as high as it would be if you independently procured a policy. Employers typically set a fixed life insurance amount based on your salary, which may not be as much coverage as you need or want.

As is true for all supplemental policies, these plans are not adequate as stand-alone health coverage, as they can leave you with unlimited out-of-pocket costs in the event of a serious medical condition.

How Much Supplemental Life Insurance Do I Need? Financial experts and insurance companies recommend having seven to 10 times your annual salary in life insurance, so if you earn $75,000 per year, the guideline would be $525,000 to $750,000 in coverage.

Can I cash out my employer life insurance? ›

You can cash out a life insurance policy. How much money you get for it will depend on the amount of cash value held in it. If you have, say $10,000 of accumulated cash value, you would be entitled to withdraw up to all of that amount (less any surrender fees). At that point, however, your policy would be terminated.

You may be able to withdraw accumulated cash value, take a loan against your coverage, access a living benefit rider or sell your policy. But selling your policy is generally only recommended if you've exhausted all other options, as doing so will cost you in fees and tax payments.

Key Takeaways

Companies pay the premiums and receive the death benefit if the employee dies. The insured employee's heirs or family do not receive any benefits. A major reason that companies purchase COLI is to profit from the tax advantages of life insurance.

There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and is subject to social security and Medicare taxes.

You cannot deduct life insurance premiums from your income taxes. If your employer pays for a life insurance, the premium paid on policy amounts above $50,000 is considered part of your taxable income.

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn't add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you.

In some cases, an employer-paid plan that pays out more than $50,000 may be taxable according to the Internal Revenue Service (IRS). Otherwise, the death benefit is paid to beneficiaries tax-free.

Companies pay the premiums and receive the death benefit if the employee dies. The insured employee's heirs or family do not receive any benefits. A major reason that companies purchase COLI is to profit from the tax advantages of life insurance.

The cost of employer-provided group-term life insurance on the life of an employee's spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit.