Should You Sign Up For Your Employer’s Life Insurance Plan?

Life insurance financially protects your family in the event that something covered by the policy happens to you. There are numerous types of life insurance plans available, but if your employer offers one, you might be wondering whether or not you should sign up for it.

In this guide, we’ll explore your options and provide details to help you decide if employer-sponsored life insurance is the right choice for you.

How does employer life insurance work?

Employers that want to offer life insurance to their employees do so by purchasing an employer-sponsored life insurance plan. Doing so gives you the option of signing up for a life insurance policy through your place of work. Coverage amounts are usually based on a multiple of your salary. For example, if you earn $60,000 annually, you might qualify for a policy with benefits totaling two times that figure, or $120,000.

Once you sign up for voluntary life insurance through your employer, the policy will function largely the same way it would if you signed up independently for term life insurance. This means you’ll have life insurance coverage for a predetermined number of years without accruing a cash value component.

Most often, employers only offer term life policies, not permanent life insurance. If you want permanent coverage, you will need to purchase a plan independent of the one offered by your employer. However, you may be able to buy a smaller permanent life insurance policy with lower premiums and supplement it with an employer-sponsored term life insurance policy.

Read our guide covering life insurance for beginners to better understand the different types of life insurance available to you.

Why do employers offer life insurance?

Many employers offer life insurance as a benefit to their employees by covering at least a large portion of their premium payments. This provides you with life insurance coverage at little or no cost typically for the duration of your time working for that employer. Companies offer benefits like this because they receive value through doing so. For example, offering the right benefits can help a business attract talented workers, minimize employee turnover and boost productivity.

Should you get life insurance through work?

Employer-paid life insurance may or may not be the best life insurance for your needs. To decide whether you should get a life insurance policy through work, evaluate the benefits and drawbacks of signing up for optional life insurance through an employer. The following section details some of the pros and cons of participating in an employer-sponsored life insurance plan.

The benefits of employer life insurance

Convenience and ease of enrollment

Life insurance policies offered by your employer can make enrollment easier. You don’t have to worry about finding the ideal provider or going through the potentially lengthy process of receiving an individual quote. In many cases, these are no-exam life insurance plans.

Instead, you inform your employer of your desire to enroll in its life insurance coverage — which typically occurs during open enrollment or new employee onboarding — and answer a few questions to activate your policy. Of course, specific enrollment procedures can vary by company.

Potential group discounts and lower life insurance premiums

The main advantage of signing up for an employer-sponsored life insurance plan is receiving the discounts you may get by doing so. Your company will likely help you pay your life insurance premiums or, in many cases, cover them entirely up to a certain amount of coverage. This leads to you getting life insurance coverage at a lower out-of-pocket cost.

No medical underwriting required

To elaborate on the point made earlier, another advantage of employer life insurance plans is that you often don’t need to complete a medical exam to qualify. This saves you time and may allow you to qualify for coverage you might not have on your own if you had to complete a medical exam, especially for those who would require a high risk insurance policy

The drawbacks of employer life insurance

Fixed or limited amount of life insurance coverage

One drawback to employer life insurance is that your maximum policy value may not be as high as it would be if you independently procured a policy. Employers typically set a fixed life insurance amount based on your salary, which may not be as much coverage as you need or want.

Coverage is tied to your employment

Employer-paid life insurance plans typically end when the employee leaves the company. You can always search for an independent plan if this happens, but the quotes you receive then may be higher than they would be now. That’s because life insurance costs vary by age. If you’re significantly older when you leave a company and then begin to look for an independent life insurance policy, your premium payments will likely cost more.

Lack of control over the life insurance policy

Your employer may give you access to a few different life insurance riders or coverage amount options. However, your control over the policy will be significantly less than it would have if you purchased your own life insurance plan. That can make it difficult to get everything you want out of a policy if it’s from an employer-sponsored plan.

Is employer-paid life insurance taxable to the employee?

You don’t have to pay any taxes on an employer-paid life insurance plan with benefits totaling $50,000 or less. However, you’ll likely need to pay taxes on benefits above the $50,000 threshold. The IRS asks two questions when assessing whether you owe tax on an employer-paid life insurance plan:

1. Does the policy offer benefits that total more than $50,000?

2. Does your employer pay any portion of the plan’s premium payments?

If the answer to both of these questions is yes, then you’ll likely owe taxes based on the premium payments your employer makes on your behalf. The IRS considers these taxable income and will add the sum of premium payments your employer makes throughout the year to your total tax liability.

As you evaluate whether employer-paid life insurance is worth pursuing, consider your potential tax liability from the policy and any remaining premium your employer won’t pay. If this sum is less than what you’d pay for the same coverage on your own, the policy is likely worth enrolling in if you want life insurance coverage.

On the other hand, if the sum of your tax liability and remaining premium payments is higher than what you’d pay for the same policy on your own, then it’s not worth enrolling in the plan. You may also want to confirm your calculations with a tax professional when making this decision.

Summary of Money’s guide to whether you should sign up for your employer’s life insurance plan

Employer-sponsored life insurance can be an affordable way to access basic term life coverage for your family. It’s also easier to enroll in than the typical individual life insurance policy and may not require a medical exam to qualify. The drawback is that company-paid life insurance is typically inflexible and directly tied to your employment. It also may not offer a large enough benefit for your life insurance beneficiaries.

If you want more coverage than what your employer offers, you can independently purchase supplemental coverage from a life insurance company or opt out of your employer’s policy entirely.

Review our guide on how much life insurance you need to learn about the factors you should consider when making this decision.