Berry Hard Work (Photo credit: JD Hancock)
Many employees have access to employer provided benefits such as health insurance, a retirement savings plan disability insurance and life insurance. Generally the coverage is group term coverage that will pay a specified death benefit up to a certain amount that is usually based on a multiple of the employee’s salary.
An employee making $50,000 per year may have group term life insurance that pays a death benefit of $40,000. Generally the employer will pay the premium for coverage up to a certain death benefit amount. Usually this amount is $50,000. The reason why is the IRS allows the employer to pay the premiums on a group life insurance policy up to a face amount of $50,000 without the employee having to include the amount the employer pays for premiums in gross income. Sometimes the employee can elect to have coverage for a higher amount but will most likely have to pay the difference between what the employer pays and the death benefit from that amount and the amount of the increase in the premiums paid for the extra death benefit.
For example, an employer may pay the premiums for the first $50,000 in death benefit but allows the employee to elect up to 5 times their salary for group term coverage. If the employee chooses 5 times their salary they will have a $250,000 death benefit. The employee will pay the premium for the additional $200,000 in coverage.
So is employer sponsored life insurance a good deal? You bet it is! Generally this is the most insurance a person can get with almost no underwriting involved. This means a person in poor health or with a pre-existing condition may get coverage for pretty cheap. For many, this is the only insurance they can get due to health or affordability.
If you can, it makes sense to buy the most group term life insurance you can buy. Supplement any additional term insurance need with coverage from a reputable insurance company.
Some employer policies are portable which means that the coverage can be taken after the employee leaves their employer. This is usually done via conversion – the group term policy converts to an individual permanent policy such as whole life or universal life. Conversion can be done without having to go through underwriting, however the premiums will likely be sky high.
This can make sense if it’s the only insurance someone can get and they still have a need. If they can get an individual term policy, this is almost always the best way to go. They can get underwritten for any term length they need – 10, 20, or 30 years and the premiums will be based on underwriting and term length.
Another idea to consider is buying a large term policy individually and then supplementing the maximum you can get through your employer. That way you’ll always have you own policy regardless of what happens to your employment.
Sterling Raskie, MSFS, CFP®, ChFC®
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An insurance agent told me that employer group life insurance plans are more expensive because the rate is based on a “standard smoker”. Indeed, if an individual is unable to get life coverage any other way, extra coverage on the company group plan makes sense. Otherwise I’ll bet the rates can be beat on the open market. And that policy would not be effected by employment status.
Now maybe I was just fed a line of stuff…any thoughts?
Hi Kerry,
Thanks for reading and responding. Generally, group term policies are less expensive than their individual counterparts since the rates are based off of the experience of the group as a whole, not individual underwriting. Also, death benefits are often capped at a multiple of an employee’s salary such as 1 to 5 times their annual salary. As you know, there’s usually no underwriting on group life policies so someone in poor health, or having trouble obtaining or affording rates in the private market can generally get affordable coverage through work and some group policies are portable when the employee separates from service.
That being said, coverage is often more affordable at younger ages in group life and can get more expensive as one ages – just like individual policies. I doubt you were fed a line of stuff but perhaps it could have been presented clearer.
Thanks again!
I agree! It shouldn’t be your only coverage if you’re still young and may not stay at your job but it is a good supplement.
Thanks for the comment, Michael!