Is Your Company’s Term Life Insurance Policy Enough Protection?

If you work for an employer, your company may provide you with group term policies.  However, is this term life insurance policy sufficient for your family’s protection?  If the unfortunate were to occur, would your employer’s term life insurance coverage maintain your family’s current standard of living?

If you are like most American employees, your company’s group term policies do not offer sufficient protection.  For most companies, the maximum amount of term life insurance coverage they offer is capped at $50,000, while other employers offer as little as $10,000 in protection.  What would happen to your family if you were to pass away and they only had $50,000 to sustain their standard of living?  Chances are that those funds would last for approximately one year.

Why Your Company Only Offers $50,000

The reason most companies cap their group term policies’ benefits at $50,000 stems from tax concerns.  If a company pays for $50,000 in coverage, they can deduct the term life policy cost for tax benefits.  However, the coverage you receive is not included in your taxable income.

However, some companies, in efforts to entice executives and upper-management personnel, do offer increased term insurance coverage.  In these situations, they may take your annual salary and multiply it by a certain value, perhaps two or three times, to calculate your total insurance coverage.

If your employer does pay for more than $50,000 in group term policies, then you are liable to include the “economic value” of the excess benefit in your taxable income.  This would be considered a line item for “additional compensation” on your W-2.   To avoid this taxation issue, some employers pay for coverage up to $50,000 in the group term policies, and then allow the employee to pay for the additional coverage that exceeds this value.

What Type of Protection is Offered via Group Term Policies

Keep in mind that most companies only purchase term life insurance that offers no cash value.  The only financial benefit comes upon your premature death.

There are other nuances that may be included in your term life policy.  For example, your insurance coverage may be transferable – which would mean that you could take a group policy and convert it into an individual 20 or 30 year term life insurance policy, allowing you to take your coverage even if you leave your employer.

Your company’s term life policy may also offer disability coverage.  If you were to fall sick or become injured to the point where you could not work, the disability option under the insurance policy can financially support you.

Your company’s term life policy may also allow you to add your spouse.  This would provide you both with insurance, typically at slightly lower rates in comparison to independently purchasing the coverage.

Think of Group Term Policies as Supplement Protection

Even with all these additional coverage options, you should still purchase your own term life insurance.  Considering that $50,000 is most likely not enough protection for your family, it is important that you classify your company’s term life policies as supplement protection.  Purchasing a 20 year term life coverage, or inquiring to see if you can increase your group term coverage, will help sufficiently protect your family should the unthinkable occur.