Group Life Insurance - Income Tax Implications of Group Life Insurance

Income Tax Implications of Group Life Insurance

  • The employer may deduct the premia that it pays for its employees so long as the employer complies with certain requirements detailed below. These come down to not discriminating in favor of key employees. Failure to comply would cause the initial $50,000 of life coverage to be included in a key employee's gross income.
    • Eligibility: the plan must benefit at least seventy percent of all employees or at least eighty five percent of all participating employees must not be key employees.
    • Benefits: the plan may not discriminate in favor of key employees. Life insurance coverage must bear a uniform relationship to an employee's level of compensation or their position within the company.
  • Employees need only report employer-paid premia to the extent that it pays for coverage in excess of $50,000.
  • Life insurance proceeds paid to a deceased employee's beneficiary.
    • Lump sum payments are income tax exempt.
    • Installment payments consist of principal and interest. The interest portion would be taxed.

Conversion to Individual Plan
  • State law determines whether a group plan must contain a conversion provision which allows the former employee to convert the group coverage to an individual policy without having to provide evidence of insurability. Where such a feature is permitted, the employee has thirty one days to convert to individual coverage. Group coverage would continue to be offered during that conversion period, irrespective of the employee's decision to convert.
  • The target plan (to which the employee converts) typically must be a whole life, rather than term, coverage. The premium for the new policy is based upon the former employee's attained age. Some employers allow the former employee to take portable group term coverage, essentially the same group coverage and rates.
Analysis and Application
While employees may have little say in the group coverage available to them, they need to be aware of existence of any portability features if and when they separate from service. It is the planner's role to help them at this critical juncture.

Group life insurance is a cost effective, tax advantaged method of enabling individual employees to obtain life insurance coverage and for many of them the only way to do so. Underwriting is simplified, benefits are less expensive and eligibility requirements are streamlined. Underlying coverage is typically annual renewable term, but whole life and universal life are also available. Depending upon state law, group life benefits may well be portable or convertible into individual coverage. Review Answers
Related Articles
  1. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  2. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  3. Professionals

    Career Advice: Financial Planner Vs. Wealth Manager

    Understand the differences between a career in financial planning and wealth management, and identify which is better for you based on your goals and talents.
  4. Mutual Funds & ETFs

    Top 3 Muni California Mutual Funds

    Discover analyses of the top three California municipal bond mutual funds, and learn about their characteristics, historical performance and suitability.
  5. Mutual Funds & ETFs

    Mutual Funds Are Not FDIC Insured: Here Is Why

    Find out why mutual funds are not insured by the FDIC, including why the FDIC was created and how to minimize your risk with educated mutual fund investments.
  6. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  7. Personal Finance

    How To Choose A Financial Advisor

    Many advisors display similar skillsets that can make distinguishing between them difficult. The following guidelines can help you better understand their qualifications and services.
  8. Professionals

    The Best Schools for Financial Planning

    Among the best universities for financial planning are the University of Georgia, Boston University, The College of Financial Planning, Texas Tech, San Diego State, Baylor, Fairleigh Dickinson ...
  9. Investing Basics

    Hiring a Financial Advisor? Look for the CFP Label

    Don’t skimp on the CFP designation. Here's why those three letters show that someone is qualified in financial and investment planning.
  10. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  1. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  2. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  3. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  4. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  5. Gross Exposure

    The absolute level of a fund's investments.
  6. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  1. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  2. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
  3. Do financial advisors work only in banks?

    While the majority of financial advisors work for financial institutions such as banks, a large proportion of them are self-employed ... Read Full Answer >>
  4. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!