Life insurance is one of those sometimes uncomfortable but necessary issues to confront head on. Insurance policies can be complex and the process of obtaining a life insurance policy may seem daunting. This may cause many individuals to relegate purchasing life insurance to the same dusty shelf as saving for retirement and balancing the checkbook. But this can be a very costly mistake to make.
You can usually obtain an individual policy on the market, either a whole life policy or a term life policy. If you wish to purchase a policy with a higher coverage amount, the insurer usually requires you to undergo a medical exam as well as answer multiple questions regarding your family history and behaviors, such as smoking. Insurers also take other factors -- your age, gender and even occupation -- into consideration when setting your premiums.
The process can be involved and cause some to avoid obtaining a policy altogether. But if you have a family to support, particularly with small children, or if you have incurred liabilities such as a mortgage that will take some time to pay off, a life insurance policy is a necessity. It can be a lifeline for those left behind.
Many employers protect employees and their families by offering a life insurance policy as part of the employee benefit package. Employees may not even be aware that they have this benefit, unless they review their employer benefits package.
How are these policies issued? The insurer issues a group policy to the employer. Since the policy covers multiple employees, and often their spouses and dependents as well, the insurer evaluates the risk of the entire group rather than the individual when setting the premium rates. By combining and redistributing the risk, the insurer can offer the policy to the employer at competitive group rates.
Must the employee go through a medical exam to obtain coverage? Generally no. The coverage is guaranteed as long as the employee is a member of the covered group (i.e. employed by the employer who obtained the group coverage). You may, however, need to agree to a medical exam or other individual underwriting if you have the option and wish to purchase additional coverage over a certain threshold.
What types of policies are generally available? The policies can range from various term life policies to supplemental life policies, to dependent life policies.
- Basic Term Life – These are the most common life insurance policies offered by employers. Typically, the coverage is based on the employee’s annual salary (for example, your benefit amount may be two times your annual salary, up to a maximum of $200,000) or it can just be a fixed amount. Coverage continues throughout the period of employment but can be reduced after an employee attains a certain age (for example, age 70). Coverage would terminate upon retirement.
- Decreasing Term Life – These policies provide coverage that decreases as you age, while your premiums remain static. For example, you may be able to obtain coverage up to $260,000 if you are under 25 years of age, but would limited to $20,000 at age 65 and only $7,000 after age 95. This type of policy can be beneficial for covering liabilities that generally decrease as you age, such as a mortgage. Ideally, this type of policy would be in addition to a regular life insurance policy, such as a basic term life policy. For example, PERA provides its members working for PERA-affiliated employers with the opportunity to enroll in a decreasing term life policy through Unum. The policy can be retained even after the PERA member terminates PERA-affiliated employment or retires.
- Supplemental Life – The coverage amounts under group term life insurance policies offered by employers may not be sufficient for all employees. If you have a large mortgage, dependents, or others debts and obligations, purchasing supplemental life insurance may be an option offered by the employer. Depending on the coverage amount you request, you may need to provide additional information to the insurer, possibly including health information. Supplemental life insurance can also allow you to purchase additional benefits which may not be included in the group term life policy, such as an Accelerated Death Benefit which would allow a portion of your life insurance to be paid in the advance upon a diagnosis of terminal illness.
- Dependent Life – Some policies may include or offer supplemental dependent life insurance coverage. Upon the death of an eligible dependent, an employee receives a payout from the policy. These are generally small lump-sum amounts.
- Accidental Death and Dismemberment (AD&D) – An employer-provided life insurance policy also often includes AD&D benefits. In the event an employee suffers an accidental death or injury covered by the policy, the policy will pay out a benefit to the employee’s designated beneficiary. The Accidental Death Benefit can be based on an employee’s salary (for example, two times your annual salary up to a maximum amount set by the policy). The policy also would provide a payout schedule for Accidental Dismemberment Benefits. The AD&D benefit would be paid in addition to the life insurance benefit.
What happens to my coverage if I leave employment? You may be able to keep your coverage by converting it to an individual life insurance policy. There are conversion deadlines set by the policy to keep in mind. By converting your group insurance policy to an individual policy within the time frame set out by the policy, you can likely keep the same benefit without going through the medical examination process that would otherwise be required.
Do I get taxed on the premiums that the employer pays on my behalf? The first $50,000 of each individual’s coverage amount under the policy is not taxable. However, if your employer subsidizes the cost of the policy, either directly or indirectly, coverage exceeding $50,000 is imputed to the employee as income. Your W-2 would then reflect a tax for the portion of the premiums for coverage exceeding $50,000.
Who receives payment in the event of my death? Your designated beneficiary would receive the life insurance payout. If the designated beneficiary predeceases you, the policy would be paid out to your estate.
This post was written by Julie Borisov from Colorado PERA.
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