Four Things You Need To Know About Group Life Insurance

Becker Suffern McLanahan, Ltd. |

The Human Resources representative asked you to review a stack of paperwork before your new employee benefit orientation meeting. Understanding that this is your first of what research indicates will be about twelve jobs, you figure now would be a good time to learn what you can about Group Life Insurance.

Group Life Insurance is a term life insurance benefit provided by your employer at no cost to you. The employer is the policy owner and pays the premium for a single contract that provides a life insurance benefit to its employees. The premium is income tax deductible by the employer as an ordinary business expense.

Companies frequently offer the benefit as a multiple of the employee’s annual income. One or two times annual income is common. No medical questions are asked, no medical exam is required, and the employee chooses the beneficiary.

Some group plans have a supplemental group life insurance benefit. This benefit allows the employee to purchase coverage in addition to the benefit paid for by the employer. Often times the supplemental group life insurance premium is higher than the premium for an individually owned term policy.

It’s not uncommon that the employee would have to prove insurability for an additional benefit. If a derogatory medical history exists, the insurance company retains the right to decline the purchase of additional coverage.

As with all financial instruments, Group Life Insurance has income tax implications. Active and retired employees are not charged any income taxes on the premium paid by the employer for the first $50,000 of benefit. However, IRC Code Section 79 states that the premiums paid on death benefits over $50,000 are considered to be an economic benefit to the employee and a portion of the premium paid by the employer is income taxable to the employee. The IRS Uniform Premium Table (Table I) is used to compute the taxable income.

If a death benefit is paid, the beneficiary does not have to pay any income tax on the proceeds.

Group Life Insurance will terminate at an age designated in the group plan document or if the employee leaves the company’s employ. In either case, the insurance company may offer the opportunity to convert the group coverage to a whole life plan without proving insurability. Generally, these policies have high premiums and only people with health issues take advantage of this option.

The only caution about Group Life Insurance is relying on it as a major component of your life insurance planning. Remember, you lose the benefit when you leave the company and you may find yourself moving to a company that doesn’t offer a benefit. If you have to replace it with individual coverage, that coverage will not be free or your application may be declined if you are in poor health.

The popularity of Group Term Life Insurance continues to grow with about 68% of US households now insured by an employer sponsored plan. Enjoy it as a free company perk with minimal income tax implications.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2020 Advisor Websites.