After a recent job change, I get new pay slips that contain cryptic entries about pay deductions. One of these entries is related to life insurance even though my employer gives me this insurance for free. Unfortunately, life insurance is considered a taxable benefit and I pay almost as much in income taxes as it would cost to buy the insurance on my own. For younger employees (like I was the last time I looked at this issue), free life insurance can be more expensive than buying it on your own.
In most group plans, life insurance premiums are based on the amount of insurance, but not the insured’s age. The plan assumes some average premium reflecting the age distribution of employees. This means that young people have an artificially high value assigned to their taxable life insurance benefit.
Employees end up paying tax on this benefit at their marginal tax rates. For young employees, this can mean paying more for the insurance than it would cost them to purchase it privately from an insurance company.
However, I’m not that young any more. Even so, the value assigned to my life insurance is more than double what I would pay privately. After factoring in my marginal tax rate, the amount I pay in taxes is only $1.47 per year less than I would pay with a private plan. So much for free life insurance.
Once you take into account the fact that this insurance would go away if I leave my employer, I’d be better off buying my own life insurance. Life insurance through group plans is usually transferrable, but the new premium goes way up unless you agree to a health check. However, if you leave your job for health reasons, this won’t help much.