What Happens to Life Insurance When You Leave a Job
For most working Americans, employer-sponsored life insurance is an important part of their overall financial protection plan. Group life insurance policies provided through work are relatively inexpensive, require no medical underwriting, and provide a basic level of coverage in the event of the employee's death. However, when you leave your job – whether voluntarily or due to layoff or termination – that employer-provided life insurance coverage typically ends as well. This can leave a crucial gap in your family's financial safety net until you are able to secure individual life insurance coverage or obtain it through a new employer.
Understanding Your Options
When leaving a job, you generally have a few options regarding your employer's group life insurance policy:
Port the Coverage to an Individual Policy
Many group life insurance policies contain a "portability" provision that allows you to convert the group policy to an individual whole life insurance policy without having to undergo any medical underwriting or examination. However, you'll likely pay considerably higher premiums for this individual portable policy, as group rates are heavily subsidized by the employer. There is also typically a limited time period of 30-60 days after termination to exercise this portable coverage option.
Convert to an Individual Term Policy
Most employers offer the ability to convert your group term life coverage to an individual term life policy with the same insurance carrier. The premiums will be higher than the group rates, but lower than a permanent portable whole life policy. Coverage amounts can generally be converted up to the amount of your prior employer's policy. Again, you'll have a 30-60 day window to convert with no new medical underwriting required.
Let the Employer Coverage Lapse
Of course, you can also choose to let your employer's group life insurance coverage lapse entirely when leaving your job if you have sufficient assets or alternative insurance policies in place. Those with working spouses who can provide coverage under their employer's plan may opt to be insured as a dependent on that policy.
Considerations When Leaving a Job
If you plan to port or convert employer life insurance when leaving a job, there are some key considerations:
- Premiums - As mentioned, the premiums for portable/converted policies will be higher than what you paid under the group rates, particularly for permanent whole life coverage. Budget accordingly.
- Coverage Amounts - You may only be able to port/convert up to the existing amount of group coverage you had through your employer, not additional amounts.
- Time Limits - Pay close attention to the 30-60 day deadlines to port or convert coverage after leaving your job. Miss this window and you may need to apply for an entirely new individual policy, subject to underwriting.
- Taxes - Any employer-paid premiums on group life insurance coverage over $50,000 is considered imputed income and will be taxable. By porting/converting to your own policy, those premiums will no longer be taxable compensation.
Shopping for New Individual Life Insurance
Of course, the alternative to porting or converting employer coverage is to start shopping for an entirely new individual term life or permanent life insurance policy on your own or through an independent broker. Some key benefits of going this route include:
- More Choices - You can shop around for the coverage amount, policy type, carriers, and premiums that best meet your needs rather than being locked into a conversion of your former employer's policy.
- Medical Underwriting - Those in good health may now qualify for lowest-premium preferred or preferred-plus underwriting rates on new individually-owned policies.
- Business Coverage - If you are starting a business, business/key person life insurance or buy-sell policies may be advisable.
The downside is that you will have to go through a full medical underwriting process including an exam and lab tests. Those with pre-existing health conditions may pay higher rates or even be denied coverage.
Whenever leaving a job, it's important to review your life insurance coverage as soon as possible and decide whether porting the existing policy, converting to an individual term policy, or shopping for a new individual policy makes the most financial sense for your circumstances. Leaving adequate life insurance in place is essential for protecting your family's financial security during major life transitions.
The information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
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