Should I accept higher employer free life insurance and pay taxes on it?

[privateID]

My employer supplies 2X salary life insurance at no cost. However, the value of coverage greater than $50K is taxable (it's called "imputed income"). I am 58 years old and plan to retire in a couple of years. I used to have other life insurance, but have slowly eliminated all other life insurance as I am close to meeting my financial goals. My question now is whether to reduce this employer free life insurance to $50K so I don't have to pay taxes on it? I know the Boglehead wisdom would say only buy as much insurance as you need. I don't need this extra life insurance, but since the net cost to me (taxes on the amount greater than $50K) is a pretty good discount, why not give my spouse an extra boost if something tragic happens the next couple of years?

Thoughts?

[TomatoTomahto]

If the taxes are not onerous, I'd just go along with the insurance. We are in the same boat, and haven't made a fuss about it.

[rob]

Do you need the extra insurance? I do what tomato does and just pay the tax but if you don't need the insurance just reduce to the tax free 50K.

[Longdog]

If it's only the taxes on the imputed income, it seems like a small price to pay to help your spouse in the case of a highly unlikely, but devastating event.

[terran]

If the taxes are not onerous, I'd just go along with the insurance. We are in the same boat, and haven't made a fuss about it.

It should just be taxed as ordinary income, so the cost is just the marginal state+federal rate on whatever the value of the insurance is.

We've turned it down because we have a term policy sufficient for our needs, so the cost of the extra taxes isn't worth the benefit.

[privateID]

If the taxes are not onerous, I'd just go along with the insurance. We are in the same boat, and haven't made a fuss about it.

The amount of imputed income will be about $1,600. I'm in the 22% Fed tax bracket and approx 7.3% state. So the cost is approx $470/yr.

[Stinky]

My general cheapskate mentality tells me to not buy things I don’t need, even if they’re at a good price.

If the store has bananas on sale, I’ll buy what I need. But I won’t buy more bananas than I need just because they’re on sale.

But you’re not me. And I wouldn’t fault you for keeping the insurance, since the marginal amount of taxes you’re paying on the imputed income is probably less than your actuarial chance of death over the next few years.

Kind of like buying a discounted lottery ticket - small chance of a big “win”. (But of course, you won’t enjoy the win because you’ll be dead).

[privateID]

I have the same question with long-term disability insurance. My employer allows me to increase the amount of this insurance. It's not free, but I pay for it with pre-tax dollars. So, for approx $400 I can up this insurance from 50% to 66 2/3%. Again, I feel I don't need it, but it is also a good deal here (although I guess the life insurance is probably a better deal). Hard to know what to pay for when close to retirement.

[Watty]

So the cost is approx $470/yr.
......
Thoughts?

It sounds like you can easily afford it.

If so then this should be 100% your spouses choice with no pressure from you to drop it.

[Rex66]

The part that’s tough is that you plan to retire soon

I’d probably still cover the disability risk if it were me. The life I’d do if I had any significant health issues.

[TomatoTomahto]

I have to admit that part of the reason we accept the imputed income is twofold:
1- HR is a PITA
2- we are both lazy.

If this could be resolved with one phone call, we’d cancel the insurance beyond $50k. Heck, we’d even happily not get employer life insurance at all, even free.

For two years now, we have fussed with state tax withholding. It’s easier to file estimated tax WH than to get HR/accounting to do things correctly.

[IowaFarmBoy]

The amount of imputed income will be about $1,600. I'm in the 22% Fed tax bracket and approx 7.3% state. So the cost is approx $470/yr.

I think you will also pay SS (FICA) and Medicare tax on this so about another 7.65%. I'm retired and have this situation from my former employer. They report it in on a W-2 in boxes 1 (wages, tips and other compensation), 3 (SS wages) and 5 (Medicare wages).

The good side is that I can use these "earnings" for a Roth contribution. The value/usefulness of this contribution will depend on your overall situation. I've got money sitting in a taxable account that I might as well get moved to a Roth and eliminate future taxation.

[Stinky]

If the taxes are not onerous, I'd just go along with the insurance. We are in the same boat, and haven't made a fuss about it.

The amount of imputed income will be about $1,600. I'm in the 22% Fed tax bracket and approx 7.3% state. So the cost is approx $470/yr.

$470 per year? For how much insurance?

[privateID]

If the taxes are not onerous, I'd just go along with the insurance. We are in the same boat, and haven't made a fuss about it.

The amount of imputed income will be about $1,600. I'm in the 22% Fed tax bracket and approx 7.3% state. So the cost is approx $470/yr.

$470 per year? For how much insurance?

Approx $280K of insurance

[snic]

If the taxes are not onerous, I'd just go along with the insurance. We are in the same boat, and haven't made a fuss about it.

The amount of imputed income will be about $1,600. I'm in the 22% Fed tax bracket and approx 7.3% state. So the cost is approx $470/yr.

$470 per year? For how much insurance?

Approx $280K of insurance

It's impossible to know whether that's a good deal without comparing it to a similar term life policy you could get on the open market. The rate for that would depend on your age, sex and health - and in fact often a visit from a nurse is required (they take your blood pressure and I don't remember what else). If you're older and/or in poor health, employer supplemental life insurance can be a great deal, better than anything you can get on the market. For a 22 year old in excellent health, not so much.

Obviously, if you don't need it, don't waste money on it, even if it's a great deal. To extend Stinky's analogy, you can make banana bread if you buy too many bananas, but you can't do anything with extra life insurance.

[Stinky]

$470 per year? For how much insurance?

Approx $280K of insurance

If you’re a 58 year old male, non smoker, in reasonably good health, who could qualify for the preferred (that is, second best) risk class, $275k of 10 year term would cost about $750 per year.

So, if you’re getting your insurance for $470 per year, you’re getting a better deal than you could get on the individual market.

And if you’re a smoker, or your health is not the best, then the employer insurance is an even better actuarial deal.

I’m still not personally not in favor of carrying insurance I don’t need. But at least you’re not getting ripped off on price.

[IowaFarmBoy]

An additional consideration- If yours is like what I get from my former employer, this is lifetime coverage. The market premium for lifetime coverage will be quite a bit higher than a term policy. Stinky's 10 year term example demonstrates that it is a good deal but it is likely to be much better when compared to a lifetime policy.

The imputed value of this coverage is set by the IRS (Pub 15-B - excerpt below). They publish factors per thousand per month by age groups and you multiply this factor by the coverage in excess of $50k x 12 months. IRS example also below. So the imputed income will increase over time.

I think it is a good deal and it will increase the estate I can leave to heirs or charity at a relatively low cost. I retired at 62 so say I live to 90- if I calculate the total imputed income up to that age on my $125k of coverage, it is about $44,000. I anticipate my total tax rate will be about 20% (12% Fed, no state, FICA and Medicare) so my actual cost will be about $8800 to add $125k to my estate.

Table 2-2. Cost Per $1,000 of Protection for 1 Month Age Cost
Under 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.05
25 through 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.06
30 through 34 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.08
35 through 39 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.09
40 through 44 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.10
45 through 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.15
50 through 54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.23
55 through 59 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.43
60 through 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.66
65 through 69 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27
70 and older . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.06

Example. Tom's employer provides Tom with group-term life insurance coverage of $200,000. Tom is 45 years old, isn't a key employee, and pays $100 per year toward the cost of the insurance. Tom's employer must include $170 in Tom’s wages. The $200,000 of insurance coverage is reduced by $50,000. The yearly cost of $150,000 of coverage is $270 ($0.15 x 150 x 12), and is 14 Publication 15-B (2024)reduced by the $100 Tom pays for the insurance. The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. The employer also enters $170 in box 12 with code C.

[Steelersfan]

I always took the company life insurance until our net worth was large enough that the DW would be just fine without the insurance proceeds.

[Stinky]

If yours is like what I get from my former employer, this is lifetime coverage.

You must have had a VERY generous former employer.

All my former employer gave me after decades of loyal service was a $10,000 retirement death benefit.

And I’ll bet a lot of folks got no life insurance benefits after retirement.

[GuyInFL]

If yours is like what I get from my former employer, this is lifetime coverage.

You must have had a VERY generous former employer.

All my former employer gave me after decades of loyal service was a $10,000 retirement death benefit.

And I’ll bet a lot of folks got no life insurance benefits after retirement.

That would be me!

[Skyway]

You say you are close to meeting your financial goals, in other words they are not met yet.
Might want to run this by your spouse, but it is hard to imagine if there is no need for 280,000
that 400-500 is an issue. Contrary to some thoughts, insurance is not only for needs, but also wants.
Why wouldn't you want your spouse to have an extra boost if the cost is less than a quarter of a percent,
basically a rounding error.

[Elric]

When we had this situation (zero need for life insurance, only cost was taxes), I turned down the life insurance. A bargain price for something we had zero use for was still an expense that served no purpose.

[donall]

Using the IRS table 2.2 from publication 15b and Iowafarmboy’s post
https://www.irs.gov/pub/irs-pdf/p15b.pdf
50 X .43 X 12 = 258. So the extra insurance cost is the income, Medicare, and social security taxes, so let’s say .40 X 258 = $103 or $8.58 monthly. The same non employer sponsored insurance would probably cost about $600 per year.
Even if you don’t need the insurance, it will get you extra points at home.

[Dottie57]

If yours is like what I get from my former employer, this is lifetime coverage.

You must have had a VERY generous former employer.

All my former employer gave me after decades of loyal service was a $10,000 retirement death benefit.

And I’ll bet a lot of folks got no life insurance benefits after retirement.

That would be me!

And me too!

For most of my work life, I bought the 2x insurance. Beneficiaries were my parents.

Last 5 years I just took the free 50k because my portfolio was much more than the insurance amount.

[bsteiner]

Is the value of the insurance more than the tax?

[privateID]

Is the value of the insurance more than the tax?

Not sure I understand the question. But I did some more calculations. Let's assume $280K of insurance.

1) If I were to buy that amount of insurance through the same company plan, it would cost $581.

2) Using the table above for a 58 year old (actually 59 since this is for next year), I get 0.43*280*12=$1,445 of imputed income. If I add in the SS+Medicare taxes to my income taxes, it's approx 37% tax on the imputed income. 0.37 * $1,445 = $535.

But do I have that comparison right? In scenario 1, isn't the cost of life insurance in a company cafeteria plan pre-tax? If that is the case, would the after-tax cost to me be (1-tax rate)* cost, or (1-.37)*581= $366. If that is the case it is not a good deal, but I feel I did something wrong here.

Looking ahead a bit, the following year where I hit the next 5-year window for the imputed income for a 60 year old, the cost of taxes on the imputed income will be $820. Not sure what it would cost to buy that amount of insurance through the same company plan, but I'd guess the imputed income case is jumping more. So, believe I won't do the full 2X salary in the year I hit 60. For next year (the year I hit 59), still deciding.

This hasn't been talked about alot, but there is also an emotional component here where I wouldn't want my wife upon my demise to feel I was cheap at her expense. So, if the insurance is a good deal, I'd probably go for it.

EDIT: I think I have that wrong above. The cost of life insurance in a company cafeteria plan is not pre-tax (at least the amount over $50K which started this whole conversation). If that is the case, then the company free life insurance with the imputed income is a better deal (which makes more sense to me), but not by much ($535 vs $581).

[TomatoTomahto]

.
This hasn't been talked about alot, but there is also an emotional component here where I wouldn't want my wife upon my demise to feel I was cheap at her expense. So, if the insurance is a good deal, I'd probably go for it.

I don’t know you or your wife, but I’m sure that would be the furthest thought from her mind. Do whatever you decide is best, but I wouldn’t let this thought live rent free in your psyche.

[afan]

You will be taxed on the insurance premiums but the annual value of the life insurance to you is the death benefit times the probability of your death each year. At your age, the probability of death in the coming year is quite low. If you are in poor health, then the value is much higher. You can look up average annual survival expectation from the Society of Actuaries.

There is a cap on the amount of income subject to SS tax. If your earned income is above that, then there is no increased SS tax on that imputed income.

[IowaFarmBoy]

If yours is like what I get from my former employer, this is lifetime coverage.

You must have had a VERY generous former employer.

All my former employer gave me after decades of loyal service was a $10,000 retirement death benefit.

And I’ll bet a lot of folks got no life insurance benefits after retirement.

Yeah, I'm fortunate to have been grandfathered into very old-school benefits- pension, paid up life insurance and partial health insurance subsidy at retirement. New hires by my megacorp don't qualify for any of these but have better matches and probably more competitive salaries.

[Valuethinker]

I have the same question with long-term disability insurance. My employer allows me to increase the amount of this insurance. It's not free, but I pay for it with pre-tax dollars. So, for approx $400 I can up this insurance from 50% to 66 2/3%. Again, I feel I don't need it, but it is also a good deal here (although I guess the life insurance is probably a better deal). Hard to know what to pay for when close to retirement.

How long would this LTD pay out for?

If it is 5 years, say, I would probably up it. If just 2 years, probably not.

[privateID]

I have the same question with long-term disability insurance. My employer allows me to increase the amount of this insurance. It's not free, but I pay for it with pre-tax dollars. So, for approx $400 I can up this insurance from 50% to 66 2/3%. Again, I feel I don't need it, but it is also a good deal here (although I guess the life insurance is probably a better deal). Hard to know what to pay for when close to retirement.

How long would this LTD pay out for?

If it is 5 years, say, I would probably up it. If just 2 years, probably not.

It's up to 2 years. Cost is $400 and I would get approx $27K/yr more for up to 2 years.

[doobiedoo]

When we had this situation (zero need for life insurance, only cost was taxes), I turned down the life insurance. A bargain price for something we had zero use for was still an expense that served no purpose.

+1

[privateID]

When we had this situation (zero need for life insurance, only cost was taxes), I turned down the life insurance. A bargain price for something we had zero use for was still an expense that served no purpose.

+1

Just wanted to add one point here. Even if financially it serves no purpose, sometimes there are other reasons to do it. Earlier I mentioned there could be an emotional component. The idea that on my demise a potential negative thought could enter my wife's mind does bother me. Adding to that, my wife would most likely hire a financial planner if I wasn't around. Maybe this insurance money could serve that purpose for many years. I think as a single survivor there would be enough money anyhow, but people tend to compartmentalize money. Knowing insurance money can be used to take my place in the form of a financial planner may be helpful in some manner entering retirement and afterwards. Not saying these consideration are totally driving any decision, just that it is a consideration. I wouldn't buy the insurance if it wasn't a good deal. But if it is, adding these consideration, I am tempted to just get it as it's not alot of money.

[Stinky]

Adding to that, my wife would most likely hire a financial planner if I wasn't around. Maybe this insurance money could serve that purpose for many years.

You said upthread that you plan to retire in about 2 years.

If yours is a typical group life plan, your term life coverage will terminate when your employment ends. At that point, you’ll be able to continue that coverage only by “converting” to a fearsomely expensive permanent life policy.

And, presuming that you’re in pretty good health, your chance of dying within the next two years is well less than 1%.

If you really want to have life insurance “for many years” to take care of your wife if you die prematurely, you’d be well served to purchase an individual level term policy. It will cost more than your group life for the next couple of years, but will likely be MUCH cheaper after you retire.

[privateID]

Adding to that, my wife would most likely hire a financial planner if I wasn't around. Maybe this insurance money could serve that purpose for many years.

You said upthread that you plan to retire in about 2 years.

If yours is a typical group life plan, your term life coverage will terminate when your employment ends. At that point, you’ll be able to continue that coverage only by “converting” to a fearsomely expensive permanent life policy.

And, presuming that you’re in pretty good health, your chance of dying within the next two years is well less than 1%.

If you really want to have life insurance “for many years” to take care of your wife if you die prematurely, you’d be well served to purchase an individual level term policy. It will cost more than your group life for the next couple of years, but will likely be MUCH cheaper after you retire.

I meant the proceeds from me dying while working in the next couple of years could be used to pay for a planner for many years. I'm really just thinking out loud here with open enrollment coming up. Should I spend a few hundred for life insurance next year? The thought crossed my mind that my wife may view that money as money to pay for a planner for many years. I have no intention of continuing the policy past retirement.

[Lyrrad]

I have the same question with long-term disability insurance. My employer allows me to increase the amount of this insurance. It's not free, but I pay for it with pre-tax dollars. So, for approx $400 I can up this insurance from 50% to 66 2/3%. Again, I feel I don't need it, but it is also a good deal here (although I guess the life insurance is probably a better deal). Hard to know what to pay for when close to retirement.

I'm paying for it now, but I plan to reevaluate as I get closer to retirement and my long term investments have grown in value.

With my employer's plan, the cost goes up as I get older, and the number of years of benefits goes down.

If I pay for it, the benefits are tax-free, but if I have the employer pay, it's taxable, so I will probably switch to employer-paid at some point.

My employer also offers a self-paid portable supplemental LTD plan that I'm considering.

[Northern Flicker]

When it comes to employee benefits, I think spousal life insurance is worth more than employee life insurance. While it can happen that someone dies while employed, the most common causes of death of working age people are medical conditions from which one most often (though not always) will have left the job when infirm but still alive.