State:

National
Group term life insurance is a popular benefit because the cost is relatively low and employees typically value the coverage highly, giving employers a big “bang for the buck.” Offering group term coverage provides basic financial security for employees and their families and helps to attract and retain the best employees.
Because group term life insurance is inexpensive and highly valued by employees, employers frequently pick up the full cost. In addition, the cost of the first $50,000 of group term insurance coverage may be provided tax-free to the employee.
The most common practice among employers is to provide employer-paid group term life insurance in an amount equal to a percentage of each employee's annual pay. There are numerous variations on this basic design, including:
• Higher benefits, such as 11/2, 2, or 3 times annual salary
• Flat-sum benefits in various multiples, such as $10,000, $25,000, $50,000, etc.
• Requiring employees to pay a portion of the premiums
• Allowing employees to purchase supplemental coverage at group rates
• Employer-paid, employee-paid, or shared payments for spouse and dependent coverage
• Additional group universal life insurance coverage giving employees additional portable insurance coverage and the ability to accumulate cash
Term insurance is the least expensive form of life insurance. A term policy covers only the “term”--usually a year--in which premiums have been paid, and it has no cash value, paying only in the event of the death of the insured. A term policy at group rates is less expensive per person than individual term policies would be for the same group of people, and a term policy is considerably less expensive than a “whole” life or “universal” life policy. These types of insurance have a cash value and are as much savings instruments as insurance policies. They are also available at lower group rates, but both are still a great deal more expensive than group term insurance.
Many companies enhance the value of their life insurance benefit, at no extra cost, by allowing employees to purchase additional insurance at the employer's group rate, including coverage for the employee's spouse and dependents. Some employers also provide accidental death and disability insurance in an amount equal to the life insurance benefit. This doubles the insurance benefit if disability or death results from a non-work-related accident. There is no consensus on the economic value of such “double indemnity” coverage, but many experts consider it helpful as a kind of air-travel insurance. Alternatively, separate travel accident policies can be purchased for those employees who travel frequently.
Although many employers pay the full cost of group life insurance, others believe that employees should contribute at least partially toward the premiums. In those cases where costs are shared between the employer and the employees, life insurance is often part of an overall package that includes other forms of insurance, such as health or disability coverage.
Some employers give each individual employee a benefit budget and let the employee select the desired benefits. Although the employer is paying the tab, the employee decides on the allocation of funds among various alternatives, of which life insurance is typically one of the most popular. Group term life insurance is one of the tax-free benefits that may be offered through a flexible benefit/cafeteria plan. Please see the Flexible Benefits/Cafeteria Plans section.
Most group policies include the right to convert to an individual life insurance policy without a physical examination at time of termination of employment. In spite of the fact that an individual life insurance policy premium can be much greater than that of a group policy, this right to convert is still a valuable privilege to many employees who, because of advanced age or poor health, might not be able to obtain other insurance.
Therefore, it is extremely important that employers inform terminating employees in writing of any such right to convert their group life policy to an individual one, in order to avoid the possibility of incurring any future liability with regard to a lapsed policy.
It has been ruled improper under the federal Equal Pay Act to provide different amounts of life insurance for male and female employees. The fact that premium rates differ by gender does not justify different employee contributions for insurance. In addition, tax laws provide that a group term insurance plan may not discriminate in favor of certain “key employees” in plan eligibility or in the type or amount of benefits provided.
As a business grows, its insurance needs will change and the design of the insurance plan will need to be examined. Employers should reevaluate their insurance needs when they grow significantly, add higher paid employees, or need to upgrade benefits to attract and retain employees. Insurance needs may also change as the age, gender, and family status of employees change.
Premiums paid by the employer for group term life insurance are generally deductible under federal tax laws as ordinary and necessary business expenses. In addition, the employer's cost for the first $50,000 of each employee's “qualified” group term insurance coverage is not taxable income to the employee.
To qualify for the tax benefit, group term insurance must be provided to groups of 10 or more employees or to all employees of an employer. Membership in a group must be based on factors such as age, marital status, or factors related to employment.
If the employer pays for coverage above $50,000, the cost of the excess must be included in the employees' gross income and is taxable. The amount of income that must be attributed to an employee is calculated from the following uniform premiums table (IRS Reg. 1.79-3 Table I) established by the Internal Revenue Service:
TABLE I. UNIFORM PREMIUMS FOR $1,000 OF GROUP TERM LIFE INSURANCE PROTECTION
5-year age bracketCost per $1,000 of protection per month
Under 25$0.05
25 to 29 .06
30 to 34 .08
35 to 39 .09
40 to 44 .10
45 to 49 .15
50 to 54 .23
55 to 59 .43
60 to 64 .66
65 to 691.27
70 and above2.06
Example. If an employer pays the premium for $70,000 in group term life insurance for a 48-year-old employee, the cost of the first $50,000 is tax-free. The cost of the $20,000 excess that must be added to the employee's taxable income reported on the employee's W-2 Form is $0.15 per $1,000 of coverage times $20,000 of coverage per month times 12 months ($0.15 times 20 times 12), which equals $36.
Up to $2,000 per person of employer-paid dependent coverage may be provided tax-free to the employee. If more than $2,000 of coverage is provided, the value of the entire amount is included in the employee's taxable income.
A simple design for group term insurance has the employer paying for up to $50,000 in basic coverage. The employee is then allowed to elect and pay for additional coverage, including coverage of family members.
Note: Even employee-pay-all supplemental insurance offered by an employer may have tax consequences. If the cost of an employee's insurance is less than the cost of the IRS uniform premium amounts, the difference will be considered taxable employee income.
A number of factors should be considered when selecting a group life insurer. These include:
• Premium rates
• Financial strength of the company, which is the best predictor of the company's ability to pay claims
• The focus of the insurer's business on small or larger employers, which is a good indicator of the insurer's expertise in serving an employer of a particular size
• Policy features offered
Employers with fewer than 1,000 employees may want to use an independent insurance broker who can provide quotes from several companies and recommend coverage features.
Last reviewed on October 19, 2016.
Related Topics:
National
Group term life insurance is a popular benefit because the cost is relatively low and employees typically value the coverage highly, giving employers a big “bang for the buck.” Offering group term coverage provides basic financial security for employees and their families and helps to attract and retain the best employees.
Because group term life insurance is inexpensive and highly valued by employees, employers frequently pick up the full cost. In addition, the cost of the first $50,000 of group term insurance coverage may be provided tax-free to the employee.
The most common practice among employers is to provide employer-paid group term life insurance in an amount equal to a percentage of each employee's annual pay. There are numerous variations on this basic design, including:
• Higher benefits, such as 11/2, 2, or 3 times annual salary
• Flat-sum benefits in various multiples, such as $10,000, $25,000, $50,000, etc.
• Requiring employees to pay a portion of the premiums
• Allowing employees to purchase supplemental coverage at group rates
• Employer-paid, employee-paid, or shared payments for spouse and dependent coverage
• Additional group universal life insurance coverage giving employees additional portable insurance coverage and the ability to accumulate cash
Term insurance is the least expensive form of life insurance. A term policy covers only the “term”--usually a year--in which premiums have been paid, and it has no cash value, paying only in the event of the death of the insured. A term policy at group rates is less expensive per person than individual term policies would be for the same group of people, and a term policy is considerably less expensive than a “whole” life or “universal” life policy. These types of insurance have a cash value and are as much savings instruments as insurance policies. They are also available at lower group rates, but both are still a great deal more expensive than group term insurance.
Many companies enhance the value of their life insurance benefit, at no extra cost, by allowing employees to purchase additional insurance at the employer's group rate, including coverage for the employee's spouse and dependents. Some employers also provide accidental death and disability insurance in an amount equal to the life insurance benefit. This doubles the insurance benefit if disability or death results from a non-work-related accident. There is no consensus on the economic value of such “double indemnity” coverage, but many experts consider it helpful as a kind of air-travel insurance. Alternatively, separate travel accident policies can be purchased for those employees who travel frequently.
Although many employers pay the full cost of group life insurance, others believe that employees should contribute at least partially toward the premiums. In those cases where costs are shared between the employer and the employees, life insurance is often part of an overall package that includes other forms of insurance, such as health or disability coverage.
Some employers give each individual employee a benefit budget and let the employee select the desired benefits. Although the employer is paying the tab, the employee decides on the allocation of funds among various alternatives, of which life insurance is typically one of the most popular. Group term life insurance is one of the tax-free benefits that may be offered through a flexible benefit/cafeteria plan. Please see the Flexible Benefits/Cafeteria Plans section.
Most group policies include the right to convert to an individual life insurance policy without a physical examination at time of termination of employment. In spite of the fact that an individual life insurance policy premium can be much greater than that of a group policy, this right to convert is still a valuable privilege to many employees who, because of advanced age or poor health, might not be able to obtain other insurance.
Therefore, it is extremely important that employers inform terminating employees in writing of any such right to convert their group life policy to an individual one, in order to avoid the possibility of incurring any future liability with regard to a lapsed policy.
It has been ruled improper under the federal Equal Pay Act to provide different amounts of life insurance for male and female employees. The fact that premium rates differ by gender does not justify different employee contributions for insurance. In addition, tax laws provide that a group term insurance plan may not discriminate in favor of certain “key employees” in plan eligibility or in the type or amount of benefits provided.
As a business grows, its insurance needs will change and the design of the insurance plan will need to be examined. Employers should reevaluate their insurance needs when they grow significantly, add higher paid employees, or need to upgrade benefits to attract and retain employees. Insurance needs may also change as the age, gender, and family status of employees change.
Premiums paid by the employer for group term life insurance are generally deductible under federal tax laws as ordinary and necessary business expenses. In addition, the employer's cost for the first $50,000 of each employee's “qualified” group term insurance coverage is not taxable income to the employee.
To qualify for the tax benefit, group term insurance must be provided to groups of 10 or more employees or to all employees of an employer. Membership in a group must be based on factors such as age, marital status, or factors related to employment.
If the employer pays for coverage above $50,000, the cost of the excess must be included in the employees' gross income and is taxable. The amount of income that must be attributed to an employee is calculated from the following uniform premiums table (IRS Reg. 1.79-3 Table I) established by the Internal Revenue Service:
TABLE I. UNIFORM PREMIUMS FOR $1,000 OF GROUP TERM LIFE INSURANCE PROTECTION
5-year age bracketCost per $1,000 of protection per month
Under 25$0.05
25 to 29 .06
30 to 34 .08
35 to 39 .09
40 to 44 .10
45 to 49 .15
50 to 54 .23
55 to 59 .43
60 to 64 .66
65 to 691.27
70 and above2.06
Example. If an employer pays the premium for $70,000 in group term life insurance for a 48-year-old employee, the cost of the first $50,000 is tax-free. The cost of the $20,000 excess that must be added to the employee's taxable income reported on the employee's W-2 Form is $0.15 per $1,000 of coverage times $20,000 of coverage per month times 12 months ($0.15 times 20 times 12), which equals $36.
Up to $2,000 per person of employer-paid dependent coverage may be provided tax-free to the employee. If more than $2,000 of coverage is provided, the value of the entire amount is included in the employee's taxable income.
A simple design for group term insurance has the employer paying for up to $50,000 in basic coverage. The employee is then allowed to elect and pay for additional coverage, including coverage of family members.
Note: Even employee-pay-all supplemental insurance offered by an employer may have tax consequences. If the cost of an employee's insurance is less than the cost of the IRS uniform premium amounts, the difference will be considered taxable employee income.
A number of factors should be considered when selecting a group life insurer. These include:
• Premium rates
• Financial strength of the company, which is the best predictor of the company's ability to pay claims
• The focus of the insurer's business on small or larger employers, which is a good indicator of the insurer's expertise in serving an employer of a particular size
• Policy features offered
Employers with fewer than 1,000 employees may want to use an independent insurance broker who can provide quotes from several companies and recommend coverage features.
Last reviewed on October 19, 2016.
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