Free Life Insurance - Really?

[BrianOB]

My wife just started a new job and her new employer is offering her a "free" $50,000 life insurance policy. Supposedly it doesn't come out of her paycheck, and it's a guaranteed minimum regardless of health. You can pay for more coverage but we don't need it (or even this really).

Obviously, I'm suspicious of anything that claims to be "free". We don't want to turn down (potential) money we're entitled to but I believe "free money" exists as much as I believe in the Tooth Fairy.

What are they getting out of this? Why are they offering her this? Is there a catch? What questions should we be asking?

[HueyLD]

Free employer provided life insurance for a certain amount has been around for a long long time, just like other employment related benefits (e.g. health insurance coverage, vacation and holidays, etc.)

Your wife may want to ask if any of the "free" coverage is taxable and how much the taxable amount will be.

[Drew31]

Sounds legit to me. I've worked at 2 companies that offer life insurance of 1x your salary, with a minimum amount of $50K.

[NYBoglehead]

My wife has the same thing. I don't think you're missing anything. For starters, the 50k policy probably costs the company next to nothing. The benefit is not so generous and the cost is so minimal to the company that it shouldn't be that unbelievable.

As far as why they would this, it's an added employee benefit. I bet it costs them less than $100/yr to provide this benefit to your wife. So long as it is truly free, I would not decline it, even if you don't need it.

[mhc]

My wife just started a new job and her new employer is offering her a "free" $50,000 life insurance policy. Supposedly it doesn't come out of her paycheck, and it's a guaranteed minimum regardless of health. You can pay for more coverage but we don't need it (or even this really).

Obviously, I'm suspicious of anything that claims to be "free". We don't want to turn down (potential) money we're entitled to but I believe "free money" exists as much as I believe in the Tooth Fairy.

What are they getting out of this? Why are they offering her this? Is there a catch? What questions should we be asking?

This is common. The only catch is if the employer provides 1x salary for "free", it is only "free" when it is below $50k. Once it goes above $50k, the employee starts paying taxes on the premiums for the part of the insurance that is above $50k. Not a big deal.

[mlipps]

Pretty standard. $50k is the max employers can provide w/o being taxed.

[mlipps]

Pretty standard. $50k is the max employers can provide w/o being taxed.

[runner9]

My wife gets 2.5X her salary up to 175K for through her employer automatically, costs $74.80 on her W2 for box 12C. Can also buy down as low as 1x salary and get "flex credits" but can't go back up without a medical clearance.

[BrianOB]

Really? I've never heard of it. It just sounded... sort of creepy. I'm reassured that it's not that uncommon and your spouses are still intact.

I poked around a bit and found this. It sounds like the loophole that allowed companies to collect on your behalf has been closed?

In a typical broad-based leveraged COLI transaction, a corporate employer would purchase policies on masses of lower-level employees, sometimes without the employees' knowledge or consent. When an insured employee died, the company received the death benefits, and the employee's family typically received either a small portion of the proceeds or nothing.

http://en.wikipedia.org/wiki/Dead_peasant_insurance


Thanks to everyone who answered!

[MN Finance]

Every company I've ever worked for provided life insurance coverage. I'm sure it's nearly uniform at any large company to have this benefit. The reason they probably provide up to $50k is that's the limit of the deductibility for this type of cafeteria style benefit. That's also why when you get more than $50k in coverage (many provide 1 yr salary) the benefit amount above that is taxable to the employee.

[mephistophles]

It's part of your total compensation package. Even though you don't pay a premium for this coverage, it is not free. The company pays for it and it becomes part of the cost of doing business and affects the price of the product to the consumer. So, ultimately we all pay for any free group life insurance (and any other benefits).

[fcox85]

I also have an employer-provided life insurance policy of $75k as a part of my compensation package. So, yes, it is legit.

[serbeer]

I get 1x of salary, my wife gets 2x from her employer. Free. Or, to be precise, employer pays for it, part of compensation package. Most large companies offer it.

Either employer gives option of purchasing more insurance (up to 5x) through paycheck deductions btw.

[dhodson]

i agree that it isnt really free. a better situation is if they will give you the cost of the policy. That way you can purchase your own policy with at least part of that money and not have the limitations of a group policy. This would be extra income and of course taxed.

[nisiprius]

In most? all? of my jobs, I've gotten a free life insurance policy for, I believe in all cases, 1X my salary. There was usually an option to buy more, conveniently, through payroll deduction. The premium was independent of age. When I was considering it, premium for the "extra" employer-provided life insurance was not terrible at all, but nevertheless not as good a deal as the term insurance I bought from TIAA-CREF, from SBLI, and from the Wisconsin State Life Fund. My recollection was that I did opt for an extra 2X salary for a few years, just as a temporizing measure, before I bought the other policies. Check off the box first, one less thing to worry about, then price-shop later.

Employers decide what package of salary and benefit to offer, based on whatever considerations they consider--probably what's customary and competitive. A small but worthwhile amount of employer-provided life insurance is so customary that, yes, it would raise my eyebrows if a prospective employer failed to offer it. I think it's a decent little freebie, and I suspect that the insurers are willing to cut good deals with employers based on the the likelihood that many employees will opt to buy some extra insurance.

[Sam I Am]

Company provided insurance has been around a long time. My initial company, GTE, and my merged company, Verizon, provides insurance of one times your annual pay as a benefit.

The life insurance is just another benefit provided by many companies.

Along with the insurance coverage that benefited me, my company also had a policy on my life that benefited THEM. Not sure what they do now, but I still have life insurance equal to my last salary while on I'm on LTD, to age 65.

Most companies also allow you to insure spouses, children, and increase your own insurance amounts, for additional premium paid by the employee.

Don't think of it as free, it is part of your benefit package.
Sam I Am

[Saving$]

Most companies have it. Usually up to 1x or 2x your salary. Anything over $50k is taxable and shows up on your W2 at the end of the year.

I know for a fact that one company I worked for also covered themselves for 1x lower level employee salaries and 2x upper manager salaries.

[Steelersfan]

Heck, I've even get a modest amount ($5k) even though I'm retired and not on the payroll.

When I was employed I got "free" an amount equal to my salary (not limited to $50k).

[LadyGeek]

Most companies have it. Usually up to 1x or 2x your salary. Anything over $50k is taxable and shows up on your W2 at the end of the year.

If it goes above $50,000 the paycheck will have an entry called "Imputed income" (not part of your salary deductions). That's where you'll find out how much your company has paid for coverage above the $50k limit, which is taxable income to you. If it's not in the paycheck summary, it will be in the year-end salary summary and W2 Box 12 as Code C.

From the IRS: Group-Term Life Insurance

[ourbrooks]

This munificent benefit is probably costing the company all of about $100 a year. It is, after all, a term policy and the insurance company doesn't have the usual marketing expenses.

[runner9]

Most companies have it. Usually up to 1x or 2x your salary. Anything over $50k is taxable and shows up on your W2 at the end of the year.

If it goes above $50,000 the paycheck will have an entry called "Imputed income" (not part of your salary deductions). That's where you'll find out how much your company has paid for coverage above the $50k limit, which is taxable income to you. If it's not in the paycheck summary, it will be in the year-end salary summary and W2 Box 12 as Code C.

From the IRS: Group-Term Life Insurance

Good point, $74.80 in 12C on wife's 2012 W2.

[SSSS]

I've got $95,000 coverage by default. It costs about $10 per year in additional tax. I think I could drop it to $50,000 to make it free, but I don't particularly care.