The Weaknesses of Employer Provided Insurance Coverages
People who have lost their jobs as a result of the pandemic are coming to the realization that much, if not all, of their needed health and life insurance coverage was tied to their employment and when they lost their job the coverage stopped unless they put new coverage that they paid for in place. It is estimated that over 16 million people are now in this situation. I wanted to present some background for our readers on this topic and highlight the weaknesses of employer provided coverages and highlight some options you have in these situations.
Continuing Health Insurance Coverage Using COBRA Rights
Congress understood the negative impact on individuals and families of losing health insurance coverage as a result of job loss. In 1985, they added a provision to The Employee Retirement Income Security Act (ERISA), which regulates employee benefit plans, called the Consolidated Omnibus Budget Reconciliation Act or COBRA as it is commonly referred. Under COBRA, health insurance coverage offered by employers must be extended to employees who are laid off or experience some other change in employment. The impacted employee is then generally responsible for the entire (unsubsidized) cost of the health insurance plan they have selected.
COBRA entitles you to coverage identical to that available to other employees who are currently covered under the former employer’s plan. COBRA health insurance coverage, however, is usually much more expensive because the former employee is responsible for the entire cost (today employers pay about 50% of the cost for employees on average). COBRA coverage typically lasts between 18 and 36 months, depending on the type of qualifying event. However, your plan can provide for longer periods of coverage. You may be eligible to extend your coverage if another qualifying event occurs or if a family member qualifies as disabled. COBRA is a federal law and if you lose your job, you will be notified by your former employer of your rights and related costs.
If you do lose your job, you will have the option of electing COBRA benefits or purchasing individual coverage. I would suggest that you work with a qualified licensed professional to find the coverage and cost that meets your needs.
Continuing Life Insurance Coverage
Unlike health insurance there is no COBRA law that allows you to continue the life insurance coverage you may have been provided by your former employer. Coverage through the workplace is typically offered through a company's group life plan. The plan only covers employees such that, if you were to leave your current job, you are no longer part of the company's group plan and your former employer doesn’t pay for your coverage.
Unless your plan provides you with additional options, in many cases you'll have only three choices: to cancel the policy, to move or what is called port the policy to another group plan with your new employer (if your policy is with the same life insurance company), or to convert the policy to an individual life insurance policy (usually at a much higher premium). Speak to your human resources representative or benefits specialist to discuss your options as part of your exit process.
Generally, if you have no other options, your coverage will end when you leave your job. That means you'll need to apply for new coverage (either at your new job or on your own) based on your current age and, most importantly, your health status). This may not seem to be a significant problem, but if you have had a recent health issue, certain health conditions can make it difficult to find an affordable policy, or even make it impossible to qualify for coverage. For these reasons, that is why I believe you need to carry individual life insurance coverage independent of what you have through your employer.
If you had coverage at work, you elected it during your benefits enrollment process when you are hired. Many employers offer their employees coverage (usually group term life insurance) at some multiple of their base salary. (For example, if your base salary is $60,000 and the employer offers coverage equal to one times your base, you will get coverage of $60,000; two times you base yields $120,000, and so on). The employer will usually pay for some portion of the coverage, and the employee will be responsible for the cost for coverage in excess of the employer-paid amount. For many people, this employer provided coverage is all the life insurance coverage they have in place. When it is no longer in place, they have no protection.
Here are some positives and negatives about group life insurance to consider:
For most plans, you only have coverage when you are working for that employer. If you leave that company, as I have stated above, most times the coverage lapses, and you will be without life insurance. Some plans allow the insured to purchase an equal amount of individual coverage to what they had while employed, but the premium rate charged will usually be much higher.
The cost of group or employer-based coverage is usually very reasonable compared to purchasing individual coverage.
The coverage offered by most employers may not be what you need. For example, most employer plans are term insurance, which will not accumulate the cash you would like to have for later in life.
You may need to pay income taxes on your employer-provided coverage in certain circumstances. The premium cost for the first $50,000 of life insurance coverage provided under an employer-provided group term life insurance plan does not have to be reported as income and is not taxed to you. However, amounts in excess of $50,000 paid for by your employer will trigger a taxable income for the “economic value” of the coverage provided to you. This amount will be calculated by your employer and included on your annual Form W-2 of taxable wages. It will be disclosed as a separate line item, and you will need to include this amount in your calculation of taxable income.
If you have lost your job as a result of the pandemic, you will be faced with the need to put new individual health insurance and, most likely, life insurance coverage in place. It is a great time to seek advice from a licensed financial professional to help you secure the coverage you need. Remember, please do not go without a reasonable amount of coverage in these key financial risk areas. If you have an unplanned health or life event, you may be causing yourself or your loved ones a situation that will leave them strapped financially.
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