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LIFE Insurance
LIFE INSURANCE INSIGHTS

Dependent life insurance covers final expenses and reduces the financial burden when a loved one dies, even if they don’t earn an income. It can be added to a life insurance policy as a rider.

Most people buy life insurance because someone depends on them financially. However, there are times when it makes sense to buy dependent life insurance coverage. The financial impact of a dependent dying may not be as obvious, but can still be a burden.

Life insurance for dependents such as your children can help to pay for final expenses like funeral costs and replace lost wages if you need to take unpaid time off.

Many employers offer life insurance as an employee benefit, and you may be able to get child life insurance through your employer, as well as coverage for your spouse. It’s usually added as a rider to your life insurance policy and is called voluntary child life insurance or voluntary dependent life insurance.

Read on to learn more about how dependent life insurance works.

KEY TAKEAWAYS
  • Voluntary dependent life insurance is coverage that can be added to your life insurance policy through work to cover your dependents.
  • You can get coverage for a spouse or child, and other dependents may also be eligible.
  • The coverage limits for this type of life insurance are usually low and are mainly intended to pay final expenses.

What is dependent life insurance?

Dependent life insurance is coverage for your dependents that is usually attached to your employer-provided life insurance policy for a small charge.

It's an easy way to get coverage at group rates. Your spouse and children can typically get coverage without a medical exam. It's a voluntary benefit, meaning the employee decides whether to get the coverage and pay the extra premiums. Premiums can be deducted from your paycheck.

"Most employers offer employee-paid dependent life insurance," says John Ehrlich, director of health and benefits for Willis Towers Watson, an employee benefits consulting firm.

The employer usually doesn't pay the premiums, although some union plans may pay for about $2,000 or less of coverage for dependents, he says.

The death benefits for children's coverage are typically small, ranging from $5,000 to $20,000. But you may get a much larger death benefit for your spouse.

"The spouse maximums have increased in recent years, with a $100,000 maximum now being the median in the large employer market and the top quartile is $250,000 and up," says Ehrlich.

Employer maximums vary and may limit the amount of coverage you purchase for yourself. For example, some employers limit spousal coverage to 50% of your coverage.

There typically aren't any health questions for coverage on children. Spouses may get guaranteed issue coverage regardless of their health status, but they may have to answer some medical questions to qualify for additional coverage.

Who is eligible for dependent life insurance?

Is a spouse a dependent for life insurance? What about an adult child? The eligibility criteria varies by employer. Spouses and young children are typically eligible and some employers also cover domestic partners.

The employer may additionally offer coverage to adult children up to a certain age. For example, it may cover children up to age 23 or extend the age to 25 for full-time students. You may be able to get coverage beyond that age for children who are disabled and can't support themselves.

You can usually get the coverage when you start your job (often within 60 days of new employment) or during open enrollment for employee benefits.

Pros and cons of dependent life insurance

Dependent life insurance through your employer is an easy way to get coverage for your spouse and children.

So should you get dependent life insurance? As with any purchase, there are some pros and cons to consider:

Pros

  • You can usually get coverage without a medical exam or may only need to answer a few health-related questions.
  • Coverage may be enough to cover funeral costs for a spouse or child.
  • Payment can be deducted from your paycheck.

Cons

  • Dependent life insurance death benefits are limited.
  • You might pay a higher rate than if you shop around with private insurance companies.
  • Coverage is linked to the job, so you lose it when you leave the company.

"Group life rates typically exceed those in the individual market because group life has generous guarantee-issue amounts of coverage for new hires, whereas individual coverage is typically medically underwritten for any amounts in excess of $10,000," Ehrlich says.

Healthy spouses may find a better deal from an individual policy that requires a medical exam if they qualify for preferred or super-preferred rates.

The rates for dependent life insurance for a spouse can also vary based on age, often in increments of five years. For example, the monthly cost may be $.06 per $1,000 of coverage for spouses aged 25-29 or $.08 for spouses aged 30-34. Those premiums may increase every five years, with monthly costs rising to $.31 per $1,000 for spouses aged 50-54 and $.49 for spouses ages 55-59, for example.

If they buy an individual policy, on the other hand, they may be able to lock in a level premium for 20 or 30 years, based on their age when they buy the policy. Compare the costs of buying their own coverage.

Dependent life insurance for children usually has a fixed rate for any eligible children but may only provide $5,000 to $10,000 of coverage.

Also, you may not be able to keep dependent life insurance after the employee leaves their job. These rules vary by employer. Some may let you convert the policy to permanent insurance, but the premiums may jump significantly.

And you may not be able to buy as much life insurance as you need -- especially if the coverage for a spouse is limited to less than $50,000. It's a good idea to use a life insurance calculator to figure out how much coverage you may need to replace your spouse's income and to pay child-care costs and other additional expenses if your spouse dies.

Is dependent life insurance a taxable benefit?

Life insurance death benefits typically aren't taxable. If the spouse or dependent dies, you'll receive the payout without owing taxes on the money, just as you would with individual life insurance payouts.

The premiums for dependent life insurance aren't taxable if you pay the full premiums yourself with after-tax money, which is how this coverage usually works. However, if the employer pays the premiums and the coverage is for more than $2,000, the insurance may be considered a taxable employee benefit. The taxable amount is based on IRS tables -- see IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits for details.

Dependent life insurance is a way to get inexpensive coverage. However, it’s important to understand those policies’ limitations when creating your life insurance plan.