What Is Employee Supplemental Life Insurance & How It Works?

Employee supplemental life insurance is an optional benefit offered through an employer, allowing individuals to purchase additional life insurance coverage beyond any basic policy their company might provide. This voluntary insurance offers extra financial protection to designated beneficiaries upon the employee’s death.

Understanding Employee Supplemental Life Insurance

Employee supplemental life insurance is an add-on policy to basic employer-provided life insurance. This additional coverage helps bridge potential financial gaps that basic coverage alone may not sufficiently address. These gaps can include mortgages, college tuition, or ongoing living expenses for dependents.

This type of insurance is typically paid for by the employee, with premiums often deducted directly from their paycheck. A notable advantage of obtaining supplemental coverage through an employer is the benefit of group rates. These rates are frequently more affordable compared to those for individual policies purchased independently.

Eligibility and Enrollment Process

Eligibility for employee supplemental life insurance commonly requires an individual to be an active, full-time employee. Many plans also extend coverage options for dependents, such as a spouse or children, with their own specific eligibility criteria. Enrollment typically occurs during specific periods, such as when an employee is newly hired or during the annual open enrollment period.

Applying involves reviewing coverage options and deciding on the desired amount. Employees then complete necessary forms, including enrollment applications and beneficiary designations. For higher coverage amounts, employees may be required to provide Evidence of Insurability (EOI). EOI involves a health questionnaire and, sometimes, a medical examination.

Determining Coverage and Premiums

Coverage amounts for employee supplemental life insurance are typically offered in several ways. Options often include multiples of an employee’s salary, such as one, two, or up to five times their annual earnings. Alternatively, coverage might be available in flat amounts, like $50,000 or $100,000, or in specific increments, such as $10,000 or $25,000 steps. Most plans also establish maximum coverage limits that an employee can elect.

Premiums are influenced by several factors. Age is a primary determinant, with premiums increasing as an individual gets older. The chosen coverage amount also directly impacts the premium; higher coverage results in higher costs. For policies requiring Evidence of Insurability, health status can affect eligibility and premium rates, though group rates often make this coverage more cost-effective than private options.

Important Policy Features

Beneficiary designation involves naming the person or entity who will receive the death benefit. It is important to specifically name primary beneficiaries and consider contingent beneficiaries, who would receive the benefit if the primary beneficiaries are no longer living. Updating these designations is important to ensure they align with current wishes and life circumstances.

Policies often include a portability feature, allowing employees to continue coverage after leaving employment, often at group rates, though they become responsible for direct premium payments. Another common feature is the conversion option, enabling employees to convert their group policy into an individual policy upon leaving their job, regardless of health status. While conversion provides continuous coverage, it typically comes with higher individual premium rates. Some policies also offer an Accelerated Death Benefit, or living benefit, which allows policyholders to access a portion of their death benefit while still alive, typically if diagnosed with a terminal or qualifying serious illness.

Tax Implications

Premiums paid by employees for supplemental life insurance are typically made with after-tax dollars. These employee-paid premiums are generally not tax-deductible for the individual. This means that the money used to pay for the coverage has already been subject to income tax.

The death benefits paid out to beneficiaries from a supplemental life insurance policy are generally received free from income tax. This tax-free status applies to the principal benefit amount. While supplemental coverage is typically employee-paid, if an employer provides group-term life insurance coverage exceeding $50,000, the imputed cost of the excess coverage may be considered taxable income to the employee under Internal Revenue Code Section 79. This imputed income is reported on the employee’s Form W-2 and is subject to Social Security and Medicare taxes. This rule primarily applies to employer-paid basic coverage, not the employee-paid supplemental portion, unless the supplemental policy is deemed “carried” by the employer under specific IRS regulations.