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 family and beneficiaries some added financial security in the event of their death.
According to the Bureau of Labor Statistics, approximately 98% of workers with access to employer life insurance choose to participate. But, is employer life insurance enough to take care of your family and loved ones?
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, including expected coverage and how different policies might work in practice. Here’s a helpful overview of employer life insurance:
What Is the Typical Coverage Offered?
Commonly, employers providing 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 individual policyholder.
Term life insurance spans a pre-set amount of years, usually lasting between 10 and 30 years. Now, in contrast, whole life insurance can cover the insured for their entire lifetime. With employer term life insurance though, coverage may lapse when employment ends or if an employee switches from full-time to part-time work.
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 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.
If an insured employee dies during the policy’s term, the insurance company is then responsible for paying the coverage amount to the decedent’s 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 a policyholder dies after the insurance term ends, their beneficiaries do not receive a payout of death benefits.
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.
In fact, 95% of employees covered by employer life insurance were not required to make individual financial contributions. However, this sort of base-line 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.
Some employment insurance is offered at an incremental cost based on employee age, as well. With this sort of life insurance, an employee aged 45 could pay more than a 25-year-old coworker for the same total life insurance coverage, excluding any major health issues.
Keep in mind that employer life insurance may be subject to income 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 passing 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.
What Happens If I Change or Lose My Job?
For many working adults, changing jobs is necessary for career growth and achieving financial goals. In fact, the Bureau of Labor Statistics estimates that the average American holds more than 12 jobs between ages 18 and 52.
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—as 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. Due to the longevity of the plan, applicants may be denied coverage due to their health and age.
What About an Additional Policy?
While employer life insurance could provide basic coverage for family in the event of an unexpected death at little to no cost, many people decide to take out additional insurance on top of it.
Just 27% of adults with life insurance in the US have only a group coverage policy, which is typically through employer-subsidized life insurance. The remainder have taken out an additional policy or expanded their coverage through a rider—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, first, to 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 co-signers or the estate could still be left with the burden of making payments on certain debts. (Note: 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 $10,000 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.
Choosing a Life Insurance Policy
Though employer life insurance can be an asset to a family’s financial security, there are many reasons why someone might want to research additional coverage.
Understanding the differences within life insurance policies and planning ahead may give individuals more flexibility and choices.
If you’re thinking about getting an additional life insurance policy or increasing your employer coverage, SoFi Protect (powered by Ladder) may be able to help with a term life insurance plan.
Getting your quote and applying online takes just a few minutes. If your financial situation changes, there is no hassle to modify or cancel coverage.
Ladder policies are issued in New York by Allianz Life Insurance Company of New York, New York, NY (Policy form # MN-26) and in all other states and DC by Allianz Life Insurance Company of North America, Minneapolis, MN (Policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to offer life insurance in the state of New York. Coverage and pricing is subject to eligibility and underwriting criteria. SoFi Agency and its affiliates do not guarantee the services of any insurance company. The California license number for SoFi Agency is 0L13077 and for Ladder is OK22568. Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other. Social Finance, Inc. (SoFi) and Social Finance Life 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. SoFi offers customers the opportunity to reach Ladder Insurance Services, LLC to obtain information about estate planning documents such as wills. Social Finance, Inc. (“SoFi”) will be paid a marketing fee by Ladder when customers make a purchase through this link. 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.
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