Tuesday, March 2, 2010

Overpaying for “Free” Life Insurance

Many employers provide free life insurance to employees as part of their benefits package. Unfortunately for the employee, the premium paid by the company is a taxable benefit. In some cases the taxes owing can actually be more than what it would cost to buy the life insurance.

I encountered this situation years ago when the tax rules changed making company-paid life insurance a taxable benefit. My company paid $1.68 per year for each $1000 of life insurance coverage. This amount had to be added to my income.

At the prevailing marginal income tax rates, I paid taxes of $0.83 per $1000 of coverage. Perversely, I could buy life insurance cheaper than this. Although the cost wasn’t huge, I tried to decline the company life insurance on principle. A confused human resources person checked into it for me and came back saying that I couldn’t decline the insurance.

At the time I tried to explain the situation to a some colleagues, but it became obvious that few believed that what I was saying could be true and none cared. So, my little revolution was stopped in its tracks. I’d be interested to hear from anyone who tries this comparison for his own situation. Do you pay more in taxes for free group life insurance than it would cost to pay the premium on your individual plan?

7 comments:

  1. I am still trying to figure out whether I have life insurance with my new job or not. I asked 2 months ago, since there "seems" to be something on my pay stub, but, no answer yet!

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  2. I find it unfathomable that you were not allowed to refuse the benefit.

    Someone's sales commission is more important than the satisfaction of the customer. Nothing new in that.

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  3. Just to pick up on Mark's comment: Perhaps the insurance is compulsory because the company gets a preferred rate if it enrolls all employees.

    My wife's health insurance through work is vastly overpriced for the services we use, but we are stuck with it, since it is a group benefit. Her employer seems contractually obligated to keep as many employees on the plan as possible.

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  4. Big Cajun Man: I think this is part of the problem. It takes a number of steps including phone calls to human resources to find out what is going on. Few people bother.

    Mark: In this case, I suspect that I was the first person who ever tried to refuse this benefit that really was free before the tax rules changed. There was no existing mechanism to refuse it, and HR underlings were told by superiors to say no to me. I suspect laziness was the main reason for the refusal. This was a time when HR was a large department rather than just one person who helps to fire people.

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  5. Gene: You may be right. Certainly in more recent years of employment I've had savings plan "benefits" where employees are encouraged to buy high MER funds. I'm told that in some instances, some of these fees get kicked back to the company. But I'll stick with my guess that in my case momentum and not wanting to allow something new that adds more complication were the main motivation for refusing to allow me to give up the life insurance.

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  6. @Michael: can you describe how you went about getting quotes for life insurance? What kind of plan did you look for, what insurers did you try, etc.

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  7. @Patrick: Most recently, I just typed "life insurance online quote" into Google and pick a promising looking result. I look for 10-year convertible term insurance. Back when I looked into this the first time I actually called various insruance companies and spoke to people. I don't remember which ones I tried. I think London Life was one.

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