Key Takeaways:
- Workers born between 1957 and 1964 changed jobs an average of once every two-and-a-half years and had an average of 11.7 jobs between ages 18 to 48.
- If you have employer-provided life insurance, you may have the option to take the policy with you if you leave your job, but the premiums will be higher; All other factors equal, premiums on an outside (i.e., not employer-provided) life insurance policy will increase as you get older.
- If your employer pays your disability insurance premiums, your disability benefits will be taxable to you; if you are taxed on (i.e., you pay your own) disability premiums, your disability benefits will be tax-free.
For many in the workforce, their employers provide them with benefits up and above their salary. Life and disability insurance are very common examples (Note: health insurance is also a very common example but will be addressed in a later article). Many times, these benefits show up as a simple line item on a paystub, but it’s a good idea to periodically review them as you move through different stages of life to ensure the benefit still makes sense for you and your situation.
Life Insurance
The Bureau of Labor Statistics estimates that 60% of non-government workers had access to employer-provided life insurance in 2019. Employer-provided life insurance is typically a fixed amount of coverage, or a formula based on a multiple of salary up to a certain limit. In some cases, employees may be able to purchase additional life insurance through their employer’s group policy. Most of the time, employees can get this employer-provided group life coverage without going through any underwriting process or providing any evidence of insurability. If you have group life insurance through your employer, there are a few things to consider.
The first question is do you even need life insurance? The young parent early in their career with children in pre-school likely has a much greater need for life insurance than the financially independent 78-year-old retiree. These are two opposite ends of the spectrum, and most people fall somewhere in between. If you have concluded that it does make sense for you to have insurance, there are some more things to think about.
Does the amount of coverage in your basic employer-provided policy cover your needs? When you think about the cost of raising and educating children, it is common to see a life insurance need upwards of $500,000 to more than $1,000,000, and in some cases, several million. Many employer-provided policies will simply not provide that amount of coverage. Further, any employer-paid premiums to purchase coverage over $50,000 will be treated as taxable income to the employee.
You should also consider your job stability. Workers born between 1957 and 1964 had an average of 11.7 jobs between ages 18 to 48. Another way to say it, this group of workers changed jobs an average of once every two-and-a-half years. What is the likelihood that you will remain at your current job for the next 5, 10, or 15 years? Will you still have a need for life insurance at that time?
When an employee leaves their employer, they may have the option to convert the group policy to an individual policy and take it with them, but the premiums will most likely be higher. You will also be 5, 10, or 15 years older – all other factors equal (i.e., assuming you are as healthy in 5, 10, or 15 years as you are today), life insurance premiums will be higher the older you are.
Thus, if you have a need for life insurance today, and you will still have that need several years down the road, it may make sense to purchase your own individual policy now. You can select an appropriate amount of coverage for your situation, and it will stay with you from job to job. You can also lock in your premiums. In the short-term, your premiums may be higher than an employer’s group policy, but they are likely to be lower over the long-term.
Disability Insurance
This is another benefit that should be examined and re-evaluated as you progress through life. Disability insurance typically provides a percentage of your salary as a benefit if you are disabled and cannot work. The first major consideration is whether you need disability insurance. The thought process is similar to that for life insurance: the breadwinner providing for a growing family with a stay-at-home spouse has a greater need for disability insurance than the more financially independent employee who has paid off their mortgage, kids are through college, and their spouse is also a high-income earner.
Assuming it makes sense in your situation to have disability insurance, one major consideration should be the taxes associated with it. If you have disability insurance through your employer, should you ever need to use it, the benefits may or may not be taxable to you. If the disability premiums show up on your paystub and you are taxed on them as if they were salary to you, the benefits to you will be tax-free. If your employer pays the premium, and you are not taxed on the premiums as if they were salary to you, then your disability benefits will be taxable to you.
This can be a major difference: consider the example of the employee with a $100,000 salary and a disability benefit providing 60% of salary. Assuming an effective tax rate of 20% between federal and state, tax-free benefits would mean roughly $1,000 per month more in your pocket.
Purchasing your own disability policy outside of your employer has pros and cons similar to life insurance. Premiums will likely be higher if you buy your own independent policy, but you would be paying the premiums so the benefits would be tax-free. Another benefit is that the policy would stay with you from job to job so you wouldn’t have to worry if your next employer does not provide disability insurance.
Whether you are relying on employer-provided life and disability insurance, or you have purchased your own policies, you should periodically review your coverages and your life situation to make sure you still need what you have. At Ballast, we welcome the opportunity to consider and help answer these questions for any of our clients. It is never too early or too late to do this kind of review. You may spend a few minutes and realize you have exactly what you need, or you may discover a gaping hole in your coverage that could be efficiently addressed now.
SOURCES:
Bureau of Labor Statistics, United States Department of Labor; National Longitudinal Surveys; https://www.bls.gov/nls/nlsfaqs.htm
Lalley, Colin & Hanzel, Patrick; Employer-provided group life insurance; Policygenius; October 20, 2019; https://www.policygenius.com/life-insurance/group-life-insurance/
