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Most people buy life insurance because someone depends on them financially. The policy can provide valuable coverage to help their dependents pay the bills if they die early and their income stops. 

However, spouses who don't earn an income or who aren't the primary breadwinner may need life insurance, too. The coverage can help pay child care costs and other extra expenses. Also, children usually don't have income to replace, but a small life insurance policy can help cover funeral costs, adding up to several thousand dollars.

Many employers offer life insurance as an employee benefit, and they may also provide dependent life insurance for employees’ spouses and children. The employer generally doesn't pay the premiums for dependent life insurance, but it can be an easy way to add coverage for your spouse and children.

The rules vary by employer. You need to review the details when deciding whether this is the best way to get coverage for your family.

 

What is dependent life insurance?

Dependent life insurance is generally offered as an employee benefit.

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, which means that the employee decides whether to get the coverage and pay the extra premiums. But you can simplify the process by having the premiums paid automatically from your paychecks.

"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 -- usually ranging from $5,000 to $20,000. But you may be able to 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 own coverage.

There typically aren't any health questions for coverage on children. Spouses may be able to get a certain amount of "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?

The eligibility criteria vary 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 children who are 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 for dependent life insurance

Signing up for dependent life insurance through your employer can be an easy way to get some coverage for your spouse and children. 

Here are three pros and cons:

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 come directly through your paychecks

 

Cons

  • Dependent life insurance death benefits are limited, so you still likely need individual coverage
  • Group rates may be higher than the individual market
  • Coverage is usually 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," says Ehrlich. 

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 their age, often in increments of five years. For example, the monthly cost may be $.06 per $1,000 of coverage for spouses age 25-29 or $.08 for spouses age 30-34. Those premiums may increase every five years with monthly costs rising to $.31 per $1,000 for spouses age 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 taxable?

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, understand those policies’ limitations when creating your life insurance plan.