IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included
in income, using the IRS Premium Table, and are subject to social security and Medicare taxes. A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if: The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost. You can view the Premium Table in the group-term life insurance discussion in
Publication 15-BPDF. Because the employer is affecting the premium cost through its subsidizing and/or redistributing role, there is a benefit to employees. This benefit is taxable
even if the employees are paying the full cost they are charged. You must calculate the taxable portion of the premiums for coverage that exceeds $50,000. A policy that is not considered carried directly or indirectly by the employer has no tax consequences to the employee. Because the employees are paying the cost and the employer is not redistributing the cost of the premiums through an insurance system, the
employer has no reporting requirements. Example 1 - All employees for Employer X are in the 40 to 44 year age group. According to the IRS Premium Table, the cost per thousand is .10. The employer pays the full cost of the insurance. If at least one employee is charged more than .10 per thousand of coverage, and at least one is charged less than .10, the coverage is considered carried by the employer. Therefore, each employee is subject to social security and Medicare tax
on the cost of coverage over $50,000. Example 2 - The facts are the same as Example 1, except all employees are charged the same rate, which is set by the third-party insurer. The employer pays nothing toward the cost. Therefore there is no taxable income to the employees. It does not matter what the rate is, as the employer does not subsidize the cost or redistribute it between employees. Generally,
if there is more than one policy from the same insurer providing coverage to employees, a combined test is used to determine whether it is carried directly or indirectly by the employer. However, the Regulations provide exceptions that allow the policies to be tested separately if the costs and coverage can be clearly allocated between the two policies. See Regulation 1.79 for more information. If coverage is provided by more than one insurer, each policy must be tested separately to
determine whether it is carried directly or indirectly by the employer. The cost of employer-provided group-term life insurance on the life of an employee’s spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit. Whether a benefit provided is considered de minimis depends on all the facts and
circumstances. In some cases, an amount greater than $2,000 of coverage could be considered a de minimis benefit. See Notice 89-110 for more information. If part of the coverage for a spouse or dependents is taxable, the same Premium Table is used as for the employee. The entire amount is taxable, not just the amount that exceeds $2,000. Example 3 - A 47-year old employee receives $40,000 of coverage per year under a policy carried directly or indirectly
by her employer. She is also entitled to $100,000 of optional insurance at her own expense. This amount is also considered carried by the employer. The cost of $10,000 of this amount is excludable; the cost of the remaining $90,000 is included in income. If the optional policy were not considered carried by the employer, none of the $100,000 coverage would be included in income.Total Amount of Coverage
Carried Directly or Indirectly by the Employer
Not Carried Directly or Indirectly by the Employer
Coverage Provided by More Than One Insurer
Coverage for Spouse and Dependents
What Is Group Life Insurance?
Group life insurance is offered by an employer or another large-scale entity, such as an association or labor organization, to its workers or members. It is fairly inexpensive, may even be free for certain employees, and is pretty common nationwide.
Group life often has a relatively low coverage amount and is offered as a piece of a larger employer or membership benefit package. Members of a group life policy do not need to submit to a medical examination and are not subject to individual underwriting.
Key Takeaways
- Group life insurance is offered by an employer or another large-scale entity, such as an association or labor organization, to its workers or members.
- Group life insurance is fairly inexpensive and may even be free since many members pay into the group policy.
- Some organizations require group members to participate for a minimum amount of time before they are granted coverage, which is generally pretty basic.
- Group life policies do not require individuals to complete a medical exam or underwriting.
- Group life policy death benefits are generally limited.
Life Insurance
Understanding Group Life Insurance
Group life insurance is a single contract for life insurance coverage that extends to a group of people. By purchasing group life insurance policy coverage through an insurance provider on a wholesale basis for its members, companies are able to secure costs for each individual employee that are much lower than if they were to purchase an individual policy.
Those receiving group life insurance coverage may not have to pay anything out of pocket for policy benefits. People who choose to take more-advanced coverage alongside it may elect to have their portion of the premium payment deducted from their paycheck. Just as with regular insurance policies, insured parties are required to list one or more beneficiaries before the policy comes into effect. Beneficiaries can be changed at any point during the coverage period.
The typical group policy is for term life insurance, often renewable each year with a company’s open-enrollment process. This is in contrast to whole life insurance, which provides coverage no matter when you die. Whole life insurance policies are permanent, have higher premiums and death benefits, and constitute the most popular type of life insurance.
With group life insurance, the employer or organization purchasing the policy for its staff or members retains the master contract. Employees who elect coverage through the group policy usually receive a certificate of coverage, which is needed to provide to a subsequent insurance company in the event that an individual leaves the company or organization and terminates their coverage.
Requirements for Group Life Insurance
Group life insurance policies generally come with certain conditions. Some organizations require group members to participate for a minimum amount of time before they are granted coverage. For instance, an employee may need to pass a probationary period before being allowed to take part in employee health and life insurance benefits.
Coverage is normally only valid for as long as a member is part of the group. Once the member leaves, whether through resignation or firing, the coverage ends.
Group life insurance policies remain intact until insured parties are terminated or leave the group.
Advantages and Disadvantages of Group Life Insurance
The biggest appeal group life insurance has for employees is its value for money. Group members typically pay very little, if anything at all. Any premiums are drawn directly from their weekly or monthly gross earnings. Qualifying for group policies is easy, with coverage guaranteed to all group members. Unlike individual policies, group insurance doesn’t require a medical exam.
However, low cost and convenience aren’t everything. Group life insurance generally comes with only basic coverage, which means it may not fulfill the needs of policyholders. Typical amounts are $20,000, $50,000, or one or two times the insured’s annual salary. That’s why experts say it should be treated as a perk and supplemented with a separate individual policy, rather than being seen as sufficient standalone coverage.
Another drawback is that the employer controls the policy, which means your premiums can increase based on decisions that your employer makes. If an organization opts to terminate group life insurance—or a person decides to switch jobs—coverage usually stops. However, the former employee does have an option to continue coverage at the individual level. This means the policy is converted from a group life policy to an individual one, which comes with higher premiums. While many people may not want the greater cost, those who are otherwise uninsurable will benefit from the conversion, as a medical exam still would not be required.
Some organizations allow group members to purchase more coverage than basic life insurance. That extra voluntary coverage may make financial sense because even the added premium will still be based on the less-expensive group rate. That part of the policy also
may be portable between jobs. Unlike the basic group policy, additional coverage often requires applicants to answer a medical questionnaire, but it may not require an actual physical exam. That could be a good option for people whose health issues might make it difficult to qualify for an affordable individual
policy.
Group Life
Pros
No medical underwriting
Inexpensive to buy (or paid by the employer in some cases)
May be able to add coverage for dependents
Cons
Relatively low death benefits
Not portable once you leave the organization
Organization controls the policy and its terms
When searching for a policy to supplement your employer's plan, thoroughly research and compare all of your options to make certain you're getting the best life insurance policy possible.
What Is the Purpose of Group Life Insurance?
Group life insurance is a common employee benefit that provides a death benefit to the insured's beneficiaries if they die while part of the organization. The purpose is to provide financial support to the families of such employees.
What Happens to Group Life Insurance Coverage After I Retire?
Once you leave the organization, group life insurance terminates (either immediately or after a short grace period). This includes being fired, quitting, changing jobs, or retirement. Certain employees may be able to convert their group coverage into an individual policy upon retirement, but the employer may not continue to pay these premiums.
What Are the Types of Group Life Insurance?
The most common type of group life insurance is group term insurance that renews yearly. This type of insurance provides only a death benefit and is the least expensive option. Group universal life is more expensive, but offers the opportunity to build cash value alongside the death benefit. Variable group universal life is similar but offers an investment option for increasing the potential returns on the cash value portion.