Life insurance is one of those things that you hope you’ll never need, but if you need it your beneficiaries will be grateful. Fortunately, many employers provide life insurance coverage through your employee benefits plan. Now is the time to learn more about the benefit and what they can mean to you and your loved ones.
Life Insurance Defined
Life insurance is a lump sum payment made to your designated beneficiary upon your death. Many people purchase term life insurance – this means the life insurance remains in force for a period of time, in exchange for the payment of regular premiums. Premiums change as you get older and your health situation changes. Eventually, the insurance company can choose not to insure you.
It’s also possible to get permanent life insurance. This coverage stays in force for your entire life unless you stop paying premiums. Permanent life insurance coverage is less common.
Is life insurance worth it?
When trying to decide if life insurance is worth it, take a minute to consider your family and the financial implications of your demise. Do you have a mortgage? Do you have dependents that rely on your financial contribution to the family?
Your family can use your life insurance benefit however they want. Common examples of how beneficiaries use life insurance proceeds include:
- – Paying for your funeral
- – Covering day-to-day living expenses
- – Paying off the mortgage
- – Post-Secondary education for your child
In many cases, families must deal with financial stress even as they grieve your passing – life insurance is meant to help alleviate that. Individual coverage can be expensive; coverage under a group life insurance policy is definitely a valuable benefit.
Group vs. Individual Life Insurance
There are two types of life insurance that you can be covered under: an individual plan and/or a group plan. An individual plan means you are the only person covered under the insurance contract. A group life insurance policy means many people are covered under the same life insurance policy.
Life insurance through your employee benefits plan is a group life insurance policy. There are a number of reasons why group life insurance is valuable. First off, because many people are covered under the same policy, group life insurance is often far less expensive than seeking out individual coverage. It’s useful to remember this if your employee benefits plan requires you to pay part of the premium: if you were to seek out coverage on your own, it would likely cost more.
Typically, group life insurance is an annual renewable term contract and often pays out 1 or 2 times your annual salary. In some cases, the benefit amount may include commissions or bonuses. It can also be a pre-specified flat benefit amount (such as $25,000 or $300,000). Group life insurance coverage remains in force until your employment with the company or organization sponsoring the plan is terminated, or until the term ends and the sponsor does not renew.
One of the best parts of having life insurance coverage through a group plan is that you have the opportunity to receive coverage when you may otherwise be uninsurable. For example, if you sought out individual coverage you may have to provide medical evidence of your insurability. If you have had past medical issues, the insurer may decline to provide you with coverage. With a group life insurance policy, everyone in the group is eligible for a certain amount of coverage, with no medical evidence required.
Often you can “top-up” or add additional amounts to your group life insurance policy – these are sometimes known as “optional” life insurance policies. They’re meant to supplement your coverage through your group benefits plan.
- NEM – The term “NEM” often comes up when discussing life insurance. NEM stands for “non-evidence maximum.” This is the amount above which an employee would have to provide evidence of insurability. For example, if the NEM for your group benefits coverage was $25,000, then you would have to provide medical details in order to be covered for any amount above $25,000.
- Conversion options – If you’re covered under a group policy and your employment with the company ends, you have the option to convert your group coverage to individual coverage without providing evidence of insurability (such as a medical questionnaire). Typically, the premiums for individual coverage (after converting from group coverage) can be higher. Often only those who may have trouble getting individual life insurance (because of medical challenges, for example) choose to convert from group to individual coverage with the same insurer.
- Taxes – Any portion of the premiums that your employer pays for group life insurance is taxable income to you (the employee). The good news is that any benefit received under the group life policy will be non-taxable to your beneficiary.
Life insurance and your benefits plan
A group benefits plan is your employer’s way of supporting you. While life insurance claims (fortunately) don’t happen as frequently as health and dental claims, they are still very valuable. This coverage ensures your family has financial support after you are gone. If you are covered under a group life insurance policy, be sure to get in touch with the plan sponsor at your company if you have any questions on this important benefit.