Should I Buy Group and Supplemental Life Insurance?
Group and supplemental life insurance is regularly offered by organizations and employers as a member or employee benefit.
If your employer offers a certain amount of group life insurance at no cost, you should take advantage of it, even if you have sufficient individual coverage.
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However, if you're relatively healthy and can qualify for reasonable rates elsewhere, we wouldn't recommend purchasing supplemental life insurance from your employer. It's often more expensive than other options, and there are some risks associated with depending on your employer to provide life insurance.
What is group life insurance?
Group life insurance is simply life insurance that is provided through an organization to a pool of people. Although the life insurance coverage is provided through an organization, you get to choose the beneficiary, which can be your spouse, your child or any loved one. You may have access to group life insurance through:
- United States Department of Veterans Affairs, if you served in the armed forces
- An association, such as AARP
- Your church
- Your employer, whether they're privately owned or part of the government
Group life insurance through your employer will typically be provided as a multiple of your salary and offer two types of coverage: basic and supplemental.
- Basic group life insurance is the amount available to you as an employee benefit at no cost. We recommend that you opt into any amount of basic group life insurance that is provided, as it offers additional financial protection to your family without your needing to pay premiums.
- Supplemental group life insurance is any amount of additional coverage you purchase through your employer.
Since an organization or employer purchases group life insurance from the insurer, the association or your employer is essentially the policyholder. So, if you move to a new job or stop paying dues, you may lose access to the life insurance coverage. In addition, you may be limited in the amount of extra insurance you can purchase.
However, basic group life insurance is typically guaranteed issue, meaning you can't be denied coverage if you're unhealthy or a smoker. This can be incredibly valuable if you're older or would have trouble covering the cost of insurance elsewhere, which could be exponentially more expensive if you're not healthy.
What is supplemental life insurance?
Supplemental life insurance, also called voluntary supplemental life insurance, refers to any group life insurance you purchase on top of what is offered by your employer. Payments are usually handled by your employer, who deducts the premiums from your paycheck. Depending on the insurer your employer works with, you may be able to purchase supplemental life insurance for yourself, your spouse and your children.
Whether you should purchase supplemental life insurance through your employer depends primarily on your health. Simply put, if you're healthy or young, you are very likely to get better rates — and more coverage options — purchasing an individual life insurance policy. On the other hand, if you need more life insurance than is provided as basic group coverage and have had trouble being approved for an individual policy, you should purchase supplemental life insurance.
Supplemental life insurance premiums are typically higher, because the insurer has very little information about your health. Therefore, they may require "evidence of insurability" if you want to purchase a large amount of coverage, as it's not guaranteed issue, unlike basic group life insurance. Demonstrating insurability can include answering health questions, allowing the insurer to review your medical records or submitting to a medical exam.
While you can usually purchase significantly more supplemental life insurance than your employer provides as basic group life insurance, the maximum is usually lower than you would be able to purchase through an individual policy. In addition, the amount of supplemental coverage available to your spouse is often fixed as a percentage of your coverage or a particular dollar amount.
Types of group life insurance policies
Group life insurance tends to be annually renewable term life insurance, so your coverage will expire within a year of leaving your employer or organization. Premiums, whether paid by your employer or you (if you purchase supplemental insurance), are primarily based on which age group you fall into (such as 30–34 or 35–39). Some insurers, such as MetLife and Prudential, also offer other types of group life insurance for companies. This can include group universal life insurance, whole life insurance, or accidental death and dismemberment insurance.
While basic group term life insurance is most often terminated when you leave your employer, supplemental coverage and permanent policies may be portable. If you decide to leave the company, for example, you may be offered the option of converting your coverage to an individual policy under the same terms. Although the option of conversion is usually guaranteed, no matter your health status, this also means that premiums will be higher than for someone in good health who is simply purchasing an individual policy.
Whether you should keep your group life insurance coverage when leaving an organization depends on your policy and health status.
- If you're fairly healthy or young, you should compare rates from several insurers, as you're likely to find better quotes for comparable coverage.
- If you had term supplemental insurance coverage and would have trouble getting comparable rates elsewhere, you should convert your policy.
- If you had permanent group insurance, you'd need to determine the policy's cash value and check the terms of your contract. Permanent policies are expensive, so keeping the coverage may not be your best option — even if you're unhealthy and the policy has a significant cash value.
Taxes on group term life insurance
Similar to an individual life insurance policy, your beneficiaries generally wouldn't pay income tax on the policy's death benefit when you die. However, you may have to pay taxes on the value of your group and supplemental life insurance, as this can be considered part of your income.
In most cases, if you have less than $50,000 of group and supplemental term life insurance through your employer, you won't have any associated income taxes. However, any group term coverage above $50,000 will be assigned a fair market value by the IRS. If your premiums total less than this fair market value, the difference will be considered part of your income and you will pay taxes on it.
For example, say you're 50 years old and have $150,000 of combined group and supplemental life insurance through your employer, and $100,000 of it is supplemental coverage. You would deduct $50,000, so the amount of coverage to be assigned fair value would be $100,000. A 50-year-old might be assigned a value of 23 cents per month per $1,000 of coverage, so your life insurance would be given a total fair market value of $23 per month. If you pay $20 per month for supplemental coverage, then the IRS will consider the leftover $30 per month taxable income.
It may seem odd to pay taxes on coverage that you already pay for. A fair market value is assigned to compensate for situations where an employee receives significantly discounted premiums by having their risk pooled with healthier people's.
There are some exceptions to this calculation. For example, if your spouse or child has more than $2,000 of life insurance, the total cost of their coverage could be considered taxable income. And, if the company offers different amounts of life insurance to certain segments of employees, you may have to pay taxes on the full cost of coverage if you're an officer or significant owner of the company.
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