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Traditional life insurance policies are designed to provide compensation for the insured’s beneficiaries when the policyholder dies. Dependent life insurance, on the other hand, pays benefits upon the death of a designated non-income earning “dependent,” which could be a spouse, domestic partner or even a child. These types of policies, which can be obtained through a group policy or added to an individual life insurance policy, may not be top of mind, but they can provide helpful financial benefits to cover the costs associated with the loss of a loved one. Bankrate’s insurance editorial team explores what dependent life insurance is to help you decide if it’s something you need.
What is dependent life insurance?
When most people purchase life insurance, they seek a policy designed to compensate their beneficiaries for lost income and support in the event the insured party dies. A less common option for life insurance is basic dependent life insurance. This type of life insurance is tailored to pay death benefits if a covered spouse, child or other dependent passes away. Dependent life insurance can be inexpensive for a child while it is typically priced higher for a spouse due to older age and increased risk.
Few people want to think of a spouse or child predeceasing them, much less make plans for the possibility. However, there are financial obligations like funeral and burial costs that may be worth consideration. Most often, dependent life insurance is obtainable through an employer’s group benefit plan option, referred to in this context as voluntary dependent life insurance or voluntary group life insurance.
How does dependent life insurance coverage work?
Typically, dependent life insurance policies limit coverage to the funeral and burial expenses of the insured. The average cost of a funeral with a viewing and burial is $7,848, according to the latest data from the National Funeral Directors Association. Policy limits are usually within this range. Most group dependent life policies offer limits in thousand dollar increments such as $4,000, $6,000, $8,000 and so on. There are often limits on how specific dependents are covered. For example, dependent coverage for children is usually offered only until a child reaches a set age.
There are also valuable options for the conversion of some dependent life insurance policies. While child life insurance is not usually convertible, a policy naming the insured’s spouse as the dependent may be converted under certain circumstances such as when the insured retires, quits, is terminated from their job or divorces the spouse. Converting a dependent life insurance policy to an individual policy would allow the spouse to keep life insurance coverage without being required to establish insurability through a medical exam.
Life insurance dependent qualifications
All group life insurance plans have specific rules for determining if a dependent you would like to insure qualifies. These differ to some extent from plan to plan, although the basic qualifications are generally similar.
Dependents that are children
Typically, the definition for qualified children is broad and covers biological children and stepchildren, as well as children legally adopted or for whom you are a guardian. Usually, children can only be insured until they reach a certain age, which is often 26. These eligibility specifications are similar to those for including a child on your medical insurance. In some cases, a full-time student, child with disabilities or other child uniquely dependent upon you may be covered for longer periods provided you can document the special circumstances.
Dependents that are spouses
For dependent life insurance purposes, spouses are usually defined in broad terms and typically includes any person state law treats as a spouse, including a common-law spouse (provided it is recognized in your state). However, a domestic partner may not be recognized as a qualifying spouse depending on the language of the specific group plan.
Dependents of military members
Family Servicemembers’ Group Life Insurance (FSGLI) is a life insurance program specifically designed for spouses and dependent children of members of the military who are also insured under Servicemembers’ Group Life Insurance (SGLI).
So long as a military member has a full-time SGLI policy, dependent life insurance should be available to their spouse and children who are younger than 18, full-time students, or permanently and totally disabled. In order to qualify, you must already have full-time SGLI coverage. The maximum coverage limit per child is $10,000 whereas the maximum coverage for a spouse is significantly higher at up to $100,000.
Pros and cons of dependent life insurance
While there may be several upsides to insuring dependents’ lives, it’s important to weigh the potential drawbacks as well. The table below lists some of the top considerations.
|Coverage is typically available without a full medical exam.||Because of limitations on dependent life death benefits, individual coverage may also be necessary.|
|Coverage is usually sufficient to cover funeral and burial costs for a spouse or child.||Because coverage is often available through group employment plans, you will likely lose coverage if you leave employment.|
|Payment can be conveniently made through payroll deduction.||Group rates are often higher than rates available from individual life insurers.|
Are dependent life insurance death benefits taxable?
Benefits are taxable in certain circumstances. Dependent life insurance is not taxable if you pay all of the premiums or if your employer pays part of the cost of a policy worth $2,000 or less.
However, if your employer pays for a greater amount of coverage than $2,000 for a dependent, the full amount of the cost of the policy is often taxable. In such cases, the Internal Revenue Service (IRS) typically treats amounts over the $2,000 cutoff as taxable income. The taxable portion of your insurance policy coverage is referred to as imputed income.
The Internal Revenue Service (IRS) has tables that calculate the amount of taxes due based upon certain factors like the age of the insured dependent. It is wise to consult a tax professional when considering your options.