Key takeaways

  • Group life insurance offered through employers can be affordable and easy to qualify for, but it typically stays behind when you leave the company.
  • Privately owned life insurance offers more flexibility and customization, as well as the ability to keep coverage no matter where you work.
  • If you have group life insurance, it’s important to plan for what will happen to your coverage if you change jobs.
  • Employer-sponsored life insurance should not be relied upon solely as it often provides insufficient coverage and does not follow you through career changes.

Group life insurance is one of those workplace benefits that can feel like a bonus — it’s affordable, easy to qualify for and gives you and your family a sense of security. But here’s the catch: it’s usually tied to your job. That means if you leave the company, voluntarily or not, your life insurance policy will likely stay behind. Suddenly, that safety net you’ve been counting on disappears, leaving you without coverage unless you take action. While it’s a great perk while you’re employed, it’s important to understand the limitations of group life insurance so you’re not caught off guard when it’s time to move on.

The difference between an employer-sponsored life insurance policy and a privately owned life insurance policy

Think of an employer-sponsored life insurance policy like the company laptop you’re given. It works great while you’re there, but when you leave, you have to return it. A privately owned life insurance policy, on the other hand, is more like your personal smartphone; it’s yours to keep, and it follows you wherever you go, no matter which job or career path you choose.

When it comes to coverage, group life insurance through your job is typically a set-it-and-forget-it deal — no medical exams or underwriting needed. It’s simple and usually covers an amount that equals one year’s salary, which can be helpful but not necessarily enough for long-term financial security. A privately owned policy, however, often requires medical underwriting and, depending on the extent, could mean you’ll need to go through a health check and exam. While that might sound like a hassle, it also means you can choose coverage that fits your needs, even into the millions if necessary.

Cost is another big difference. Employer-sponsored life insurance is often either free or very inexpensive, making it a great deal while you’re employed. But if you opt for your own policy, the cost will depend on factors like your age, health, lifestyle and coverage amount. The upside? It’s yours to keep and customize, ensuring you stay protected whether you’re switching jobs or retiring.

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Group life insurance taxes

Group life insurance is often free due to your employer paying the premiums, but it’s important to note that only the first $50,000 of group coverage is excluded from your taxable income. According to the IRS, the cost of any coverage in excess of $50,000 needs to be reported as taxable income. This rule applies whether premiums are paid by your employer or you directly.

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What happens to life insurance when you leave a job?

Leaving a job can feel like closing one chapter and starting another, but your life insurance might not make the transition with you. Many group life insurance policies come with an “actively at work” requirement, which means if you’re not on the job — whether you quit, were fired or are out due to illness or injury — your coverage could vanish. For example, say you’re in a serious accident, hospitalized for an extended period, and, tragically, you pass away. If, during that time, you were deemed no longer “actively at work,” your group life insurance may not pay out any benefits to your family. Unfortunately, this isn’t a rare issue. According to the 2024 LIMRA and Life Happens Barometer Study, 26 percent of Americans rely solely on group life insurance without any backup plan. If you have loved ones relying on you, that’s a serious gamble.

Now, let’s talk about your options. Some employer-sponsored life insurance plans are portable or convertible. 

  • Portable means you can take your policy with you when you leave the company, though you’ll probably face higher premiums.
  • Convertible policies allow you to switch your group coverage to an individual plan, like whole or universal life insurance, but again, expect those premiums to jump.

So, when you say goodbye to your job, don’t forget to think about your life insurance too. A little planning can ensure your coverage follows you, keeping your loved ones protected even as you move on to a new company.

What about voluntary group life insurance?

In addition to basic group life insurance, many employers offer an extra option for more coverage through voluntary or supplemental life insurance. This gives you the chance to buy additional protection, sometimes up to five times your annual salary. If this sounds like a good deal, it often is, especially if you have any health concerns, since the cost is typically lower than what you’d pay for a privately owned policy. That’s because rates are based on a group, not individual risk factors. However, here’s the catch: those affordable rates aren’t fixed and usually increase every five years. Additionally, if you’re in great health, individual coverage will likely be cheaper.

But there’s more to consider. Just like your basic group life insurance, voluntary life insurance doesn’t automatically follow you when you leave the company. It might be portable or convertible, but either way, brace yourself for higher premiums. When you leave that employer group, the cost of maintaining your coverage can jump significantly.

Voluntary group life insurance can offer valuable extra protection at an affordable rate while you’re employed, but it’s important to plan ahead and understand how things might change if you ever decide to move on.

Should you get life insurance through your job?

Getting life insurance through your job is often convenient, but like most things, it comes with its pros and cons. It’s a great perk if you’re looking for quick coverage without jumping through too many hoops, but it’s not without limitations. Here’s a breakdown of what to consider:

Pros Cons
It’s typically subsidized or free through your employer. Coverage usually equals one year’s salary, which may leave you underinsured.
No lengthy application process — quick and simple to obtain. If you can keep your coverage when you leave the company, rates often increase significantly.
No medical exam or underwriting is required to qualify for basic coverage. Group insurance is often one-size-fits-all, meaning limited customization for your needs.
You may have the option to purchase additional coverage at affordable group rates. The “actively at work” clause could leave you without coverage if you’re absent due to illness or injury.
If you leave, some plans may allow you to convert to an individual policy to maintain coverage. Employer plans can change benefits at any time, making them less reliable long-term.

Obtaining life insurance through your employer has its perks. However, it’s important to know that it shouldn’t be your only safety net, especially if you have dependents. Group life insurance often provides insufficient coverage and doesn’t travel with you through life’s twists and turns. A privately owned life insurance policy, on the other hand, offers more flexibility and customization, and most importantly, it stays with you no matter where you work. It’s often a smart move to have individual life insurance in place to ensure your family’s financial security is protected, no matter what changes come your way.

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