Dec. 29--Many employees can access employer-provided benefits such as health insurance, a retirement savings plan -- and life insurance. Health and retirement plans bring clear-cut advantages. If your employer offers life insurance, though, a little math helps you determine of you need the coverage.
Generally, life coverage from an employer is group term coverage paying a death benefit up to a certain amount, usually based on a multiple of your salary. If you make $50,000 per year, for instance, your group term insurance pays a death benefit of $40,000.
(Once a term policy expires, you decide whether to renew it or to let the coverage end. In addition to being cheaper than whole life or other life insurance types, term offers protection against of number of different bad scenarios and sells for several different spans of time.)
Your employer often pays the premium for coverage up to a certain death benefit (usually $50,000). Why? The Internal Revenue Service allows your employer to pay the premiums on a group life insurance policy up to that amount because the IRS figures anything above it counts as taxable compensation to you the employee.
Sometimes you can elect coverage for a higher benefit amount but probably must pay for the extra coverage out of your own pocket. Best to shop around, of course, for the best term rates.
As an example, your employer may pay the premiums for the first $50,000 in death benefit but allows you to elect up to five times your salary for group term coverage. If you take that option, you have a $250,000 death benefit but you pay the premium for the additional $200,000 in coverage.
We all hear about the golden goodies like subsidized health insurance and employer matches of retirement funds. Is employer-sponsored life insurance also a good deal? You bet.
Often this is the most insurance you can get with almost no underwriting involved. This means even with poor health or a pre-existing condition, you may get life coverage pretty cheap. Buy the most group term life insurance you can and supplement any additional term insurance need with coverage from a reputable insurance company.
Some employer policies are portable; you can take the coverage with you if you leave your employer. You usually do this via what's called conversion: The group term policy converts to an individual permanent policy such as whole life (the insurer pays you an annual dividend) or universal life (which, among other conditions, allows you to use earned interest to help pay premiums).
Though you can convert without going through underwriting, the premiums are likely sky-high. This makes the most sense if it's the only insurance you can get and you still need such coverage.
In such a situation, consider an individual term policy, which you get underwritten for any term length -- 10, 20 or 30 years -- with your premiums depending on underwriting and term length. Another idea: Buy a large term policy individually and then supplement the maximum you can get through your employer.
That way, you always have you own policy regardless of what happens to your employment or to your boss.
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Sterling Raskie, CFP, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is an adjunct professor teaching courses in math, finance, insurance and investments. His blog is Getting Your Financial Ducks in a Row, where he writes regularly about investments, retirement savings and financial planning. His latest book is Lose Weight Save Money.
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