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A bank draft (which SoFi doesn’t offer at this time) is a document that looks like a check, but the payer’s bank guarantees the funds, making them extremely reliable. Since bank drafts have no limit, their increased security makes them ideal for hefty transactions, such as purchasing a car. They are often used in business transactions as well.

Bank drafts can foster trust in a deal involving large sums of money since there’s no worry about a bounced check or handing over piles of physical cash. Here’s how a bank draft works and what to expect when you use one.

Bank Draft Definition

A bank draft is a financial instrument used to make payments — frequently large ones — that have your bank’s financial backing. Bank drafts look like typical checks but can’t bounce because the bank ensures the payment will go through, usually within 24 hours. In addition, bank drafts can be for any amount you like, unlike the situation with wrangling, say, ATM withdrawal limits.

You typically obtain a bank draft either by visiting a bank branch in person or making a request in writing. You’ll usually pay a fee of $0 or $10 to get a bank draft drawn on your checking account. While bank drafts technically don’t expire, financial institutions may refuse to process a bank draft that is more than a few months old.

Money Orders vs Bank Drafts

You can use both money orders and bank drafts to make payments, but these tools differ in several ways.

•   Money orders sent domestically must be less than $1,000, while bank drafts don’t have limits.

•   You must have a bank account to draw upon in order to get a bank draft, but you can get a money order from a bank, U.S. post office, and select grocery stores and retail locations. Money orders are often bought with cash, a debit card, or a traveler’s check.

•   You can cancel a money order and get a refund if your payee hasn’t cashed it yet, but banks usually won’t cancel a bank draft.

Knowing these differences can help you determine which financial tool is best suited for your situation.

How Do Bank Drafts Work?

To get a bank draft, you will typically follow these steps.

•   Ask your bank or credit union to issue a bank draft for the desired amount. You can do so in person at a branch or in writing.

•   Next, your financial institution confirms your account has sufficient funds for the bank draft and moves the money from your account into its reserve account. This way, they can guarantee the bank draft, meaning your payee can be sure of receiving payment.

•   Lastly, your financial institution creates the physical document with the payee’s name on it. Typically, you get a bank draft in person at a branch, though they can also be obtained via mail.

Like ATM fees, your financial institution may charge a nominal fee for bank drafts (as noted above, typically close to $10). However, you might receive the first several bank drafts for free at your bank. In addition, using a specific amount of bank drafts per month might eliminate the fee.

Pros and Cons of Bank Drafts

Bank drafts have pros and cons, just as checks, e-checks, money orders, and cash do. Keep the following in mind when using bank drafts:

Pros

First, the advantages of bank drafts:

•   Your financial institution acts as the intermediary for the transaction, making the payment secure and convenient. It adds a level of trust.

•   A bank draft is safer than carrying thousands of dollars in cash.

•   Bank drafts can’t bounce since your financial institution guarantees the payment.

•   Bank drafts have no limit in terms of the amount.

•   Therefore, they’re helpful for sizable transactions, such as a down payment for a home.

•   The Federal Deposit Insurance Corporation, or FDIC, insures most financial institutions, meaning the government will fulfill the bank draft’s value in the rare instance of a financial institution failing. This insurance covers up to $250,000 per depositor, per account category, per institution.

•   Bank drafts generally clear within 24 hours.

•   Financial institutions can usually convert bank drafts into the payee’s preferred currency, from U.S. dollars to euros and beyond.

As you can see, bank drafts can be a very useful tool to make a large payment.

Cons

Next, the downsides of bank drafts:

•   Your financial institution might charge you to issue a bank draft.

•   The bank draft isn’t an electronic transfer; it’s a physical document you must deliver to your payee.

•   Since it’s a physical document, your bank draft might become lost, stolen, or damaged.

•   It’s typically impossible to cancel a bank draft and receive a refund.

•   It may be challenging (but not impossible) to recover your money if it is lost.

•   Fees could be higher than other methods.

In these ways, there are some negative aspects to bank drafts that may mean they are not appropriate for every situation.

Canceling a Bank Draft

Generally, you can only cancel a bank draft in dire situations. Theft or fraud are usually the only reasons a financial institution will cancel a bank draft. However, your financial institution may have a policy stating they won’t cancel bank drafts under any circumstances.

That said, if you want to cancel a bank draft for a reason other than theft or bank fraud, you could have the payee cash the bank draft and give you the money. This option requires trusting the payee to agree to and provide the refund.

Bank Draft Alternatives

While bank drafts may suit some payment scenarios, they are just one among many ways to send money.

•   One alternative to bank drafts is automatic clearing house (ACH) payments. The ACH network allows banks, credit unions, and financial institutions to transfer funds to each other electronically. ACH payments are usually free but may have transfer limits. Also worth noting: They are solely for domestic transactions.

•   You could use a wire transfer, another electronic payment type that usually completes the payment within 24 hours. As with ACH payments, wire transfers have limits, such as $10,000 or $100,000. However, wire transfers are viable for foreign transactions.

•   Checks are another option. Receiving a large sum via a standard check involves the risk of it bouncing, so payees may hesitate to accept this form of payment. You could pay for a cashier’s check from your financial institution. This means the bank uses its funds to guarantee the payment. A certified check, in which the bank verifies that you to have the necessary funds in your account, is another possibility.

•   Money transfer apps, including such P2P platforms as PayPal and Venmo, are a financial tool that can offer speed and security as you move funds. (Instant accessibility may be available if the recipient pays a fee.) These apps may charge transaction fees and usually have daily transaction limits.

Money transfer apps link to your bank account, making their use seamless and convenient. However, depending on the app, your transaction might not have FDIC insurance, meaning a botched transaction could result in the permanent loss of money. In addition, the payer and payee need to have the same app to conduct a transaction.

As you see, there are many ways to transfer funds if a payment by bank draft doesn’t suit your needs.

The Takeaway

A bank draft is a financial tool typically used for large transactions, such as the payment for a home, a vehicle, or the purchase of office equipment. The bank guarantees payment to the payee by using its own reserves after verifying and transferring the issuer’s funds into a reserve account, which adds a layer of security and trustworthiness. However, because bank drafts are physical documents that you can’t easily cancel and that are subject to damage or theft, it’s best to handle them carefully and perhaps consider alternatives, such as electronic payments.

FAQ

How long does it take for bank draft to clear?

Bank drafts usually take 24 hours or less to clear because the payer’s financial institution guarantees the funds. However, the receiving bank may have its own policies about when it makes funds available to the account holder, so check with your financial institution about timing if you are receiving a bank draft.

Is a bank draft available immediately?

Bank draft funds generally become available within 24 hours of the payee depositing them. However, the payee’s financial institution might take up to a few business days to make the funds available, depending on its policies.

What do you need for bank draft?

You need a bank account to issue a bank draft. In addition, you need your account to have funds equal to or greater than the payment amount. You may also need to pay a small fee for the bank draft; typically, the cost is $10 or less.

Does a bank draft require a signature?

Neither the issuer nor the payee need to provide a signature for a bank draft. The sole party that signs a bank draft is an employee of the issuer’s bank or financial institution.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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The first step is to fill out an application with your carrier of choice. You’ll want to be well versed in whole and term, whether a medical exam is required, contestability, and the right amount of insurance needed.

Many jobs come with a benefits package on top of paid wages or salary — things like, health insurance, dental insurance, and 401(k) retirement accounts. Employer life insurance may also be included in a benefits package to give an employee’s beneficiaries some added financial security in the event of their death.

According to the U.S. Bureau of Labor Statistics, approximately 98% of workers with access to employer life insurance choose to participate. But is life insurance offered through your employer enough to take care of your loved ones if you pass away?

There’s no one-size-fits-all approach to financial planning and purchasing life insurance. Depending on an individual’s unique situation and financial goals (or obligations), the amount of life insurance coverage needed can vary from person to person.

To help determine how much life insurance is right for you, let’s break down the basics of employer life insurance and how different policies might work in practice.

What Is the Typical Coverage Offered?

Commonly, employers that provide life insurance purchase a group term policy for their employees. Term life insurance grants coverage for a specific time period, known as the term, in exchange for regular payments (called premiums) by an employer or the insured employee. Unlike individually purchased term insurance, the term for group insurance is typically the duration of the employ of the insured.

Group term life insurance can also vary by amount. An employer may offer a flat rate of coverage to their employees. Or, in some cases, an employer may calculate the total life insurance coverage according to an employee’s current salary. For example, an employer life insurance policy may pay out one, two, or three times the employee’s annual salary.

While the benefit coverage amount under employer life insurance may vary by salary, you may still qualify for a group policy even if you’re older or have pre-existing conditions and less-than-perfect health. However, note that coverage may lapse when employment ends or if an employee switches from full-time to part-time work. Some companies offer policies that are “portable,” meaning the employee can take the policy with them when/if they leave the employer.

Life insurance could reinforce a long-term financial plan.

If an insured employee dies during the policy’s term, the insurance company is then responsible for paying the coverage amount to the designated beneficiaries, barring a few exceptions, like suicide within two years of the policy start date or death from an exempt hazardous activity (e.g. piloting a plane).

This payment is called a “death benefit,” and can be paid as a lump sum or in installments depending on a policy’s conditions. On the other hand, if an insured employee dies after the insurance term ends, their beneficiaries do not receive a payout of death benefits.

Recommended: What Is Life Insurance & How Does It Work?

How Much Can Employer Life Insurance Cost?

For employers with many employees, obtaining a group life insurance policy parallels wholesale purchasing, meaning that the price per individual is generally less than if each employee paid for their own policy. Therefore, employment life insurance is usually very affordable for employees, if not free, for the most basic coverage.

However, this sort of baseline benefit does not account for additional coverage, which employers may also offer (on top of the standard group policy) at the partial or full expense of the employee.

Determining if extra coverage through an employer is cost effective may depend on several factors, including age, health, income, and number of dependents. For example, smokers can pay up to two or three times more on life insurance premiums than their non-smoking counterparts.

Keep in mind that employer life insurance may be subject to payroll taxes, such as Social Security and Medicare. For any benefits coverage greater than $50,000 that is paid or subsidized by an employer, the total amount exceeding $50,000 would be counted as employee income by the IRS.

The threshold for taxation on coverage for spouses and dependents is significantly lower, at just $2,000. Any employer life insurance plan with coverage above $2,000 would be liable for taxation in its entirety.

Is It Possible to Switch Coverage?

Employer life insurance can be affordable, but it may not be very customizable or flexible.

Since the employer holds the group policy with a specific insurance company, employees do not usually have the individual discretion to shop around for the coverage offered in a benefits package.

Opting for an alternative or supplemental life insurance policy may require undergoing a life insurance medical exam. This exam could consist of a verbal questionnaire with a medical professional and collecting blood and/or urine samples.

Together, medical history and personal information are some of the different factors used to decide whether an applicant is eligible for life insurance coverage.

Information from the medical exam can impact the cost of the eventual insurance premium as well, assuming the applicant is deemed eligible. In this scenario, younger, healthier employees may opt to switch to an individual life insurance policy, since they could obtain a lower rate that may last for decades of coverage.

Since employer life insurance coverage can lapse when employment ends, it may be useful to research various policy options (or speak with a benefits specialist at your job) to ensure coverage is not interrupted when jobs change.

Recommended: How to Buy Life Insurance

What Happens If I Change or Lose My Job?

For many working adults, changing jobs is necessary for career growth and achieving financial goals. But changing or leaving a job may come with some financial challenges beyond a disruption to income. Employer benefits, such as health insurance, 401(k) retirement account, and life insurance may be put on hold or not carry over to a new employer.

Some insurance companies may let you transfer to a new employer’s policy, especially if they are the new employer’s insurance provider. In some cases, it may be possible to convert a former employer’s group term policy to individual term or whole insurance with the same insurance company.

When life insurance had previously been paid for or subsidized by an employer, taking out an individual policy could translate into an increased individual monthly expense. That’s because the policyholder, not the employer, would now be paying the life insurance premiums.

Whole life insurance, sometimes called permanent life insurance, is generally more expensive than term policies, since it can cover an insured individual for life.

What About an Additional Policy?

Employer life insurance could provide at little to no cost basic coverage for a family in the event of an unexpected death. But many people decide to take out additional insurance or expand their coverage through a rider, which is an add-on that allows insured individuals to customize their policy to their needs.

Cost and conditions for riders can vary between insurance providers. The following are some common types of riders that might supplement an existing life insurance policy:

•   Accidental Death Rider: If the insured individual dies from an accident, a greater death benefit is paid out to beneficiaries. This could be advantageous for a working parent to take care of surviving family’s future expenses if the unexpected were to happen.

•   Accelerated Death Benefit Rider: An insured individual could receive a portion of their death benefits while they’re alive if a diagnosed terminal illness is expected to significantly reduce their lifespan. This could help pay for the sudden cost of care and treatment, but might be subtracted from the amount family and beneficiaries receive upon the insured person’s death.

•   Spouse Insurance Rider: This rider can add a spouse to an insured person’s policy instead of taking out separate life insurance for them.

•   Waiver of Premium Rider: This rider can waive the need to pay insurance premiums while maintaining coverage, if an insured person becomes permanently disabled or can no longer work due to an injury or illness. Policyholders who are at risk due to dangerous jobs or family history may find this sort of policy worthwhile.

In addition to considering the perks and costs of riders, comparing term and whole life insurance is helpful for finding the right policy for you.

Determining How Much Coverage You Need

Everyone’s situation is different. And, securing life insurance may provide confidence and reinforce a long term financial plan. To figure out how much life insurance coverage may be needed, it can be helpful to first get an accurate picture of your finances and likely future expenses.

For people with children and dependent family members, a breadwinner’s death could result in lost income that supported essential spending, such as groceries, rent or mortgage payments, and utilities. It could also create additional expenses for childcare or a home health aide, if a surviving parent or caregiver then needs to work.

There are also down-the-road expenses, like retirement and college tuition for children, that could be impacted by the loss of a spouse, partner or parent.

Unpaid debt — such as, a mortgage loan, credit card balances, and student loans — are some long-term payments to factor in — since cosigners or the estate could still be left with the burden of making payments on certain debts. (Note that estate and debt laws vary from state to state).

Death can be accompanied by notable end-of-life expenses, too. On average, funerals cost between $7,000 and $12,000 depending on location and whether the deceased is buried or cremated.

In addition to savings and investments, life insurance can offer a financial safety net and support the future of those left behind.

Recommended: Life Insurance Calculator: How Much Life Insurance Do I Need?

The Takeaway

Employer life insurance can be an asset to a family’s financial security, as typically it grants coverage for a specific time period. The benefit coverage amount may vary by salary, and older employees or those with pre-existing conditions may still qualify for a group policy. Coverage could expire when your employment ends or if you move from full-time to part-time work. If you need more coverage, you may decide to take out additional insurance on top of your employer life insurance.

SoFi has partnered with Ladder to offer competitive term life insurance policies that are quick to set up and easy to understand. Apply in just minutes and get an instant decision. As your circumstances change, you can update or cancel your policy with no fees and no hassles.

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Thinking about your family’s financial security? Life insurance could help put a plan in place for the unexpected and cover a myriad of expenses.

What is universal life insurance? Universal life insurance plans let policyholders receive the contracted coverage over their lifetime. Here’s more info.