Is group term life insurance taxable?
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Group term life insurance can be a great employee benefit offered as part of a comprehensive compensation package. If you are currently employed by a company that offers both competitive salaries and other non-monetary benefits, you know that it feels nice to be offered coverage that will protect your family and help them survive if you pass away. The extra employer-sponsored benefit can add to your insurance portfolio and can even help family members that are not classified as insurable get the coverage that they need to cover financial burdens and obligations. Start comparing life insurance rates now by using our FREE tool above!
While there is a long list of benefits that are associated with electing to pay for your group life insurance, there may also be drawbacks that you should be aware of. Many times, you are limited in just how much group life coverage you are allowed to carry. This limit is typically a multiple of your annual income, which can really be limited when you are not a high wage earner. Another drawback is that there is a chance that a portion of your benefit for group life will be taxable when it comes time to file. Read on, and learn more about group life insurance and when it may be considered taxable income.
Benefits of Carrying Group Life Insurance
You should always be able to weigh the pros and cons of all products before you elect or reject them. Group life is considered to be an employer-sponsored benefit because your employer will pay for a portion of your premiums.
The fact that your employer pays for some or all of your premiums will reduce your out-of-pocket expense for the coverage.
If cost is very important to you, group policies tend to be the most affordable because you will receive discount rates and because you are not left to pay all of the premiums on your own. Cost alone is enough to drive you to find a job where group life is available, but that is not the only advantage. Here are some additional benefits to consider:
- Guaranteed Insurability
What separates group policies from individual policies is that applicants cannot be denied coverage for pre-existing conditions, hazardous occupations or for their age. If you are not in an age range where insurance is inexpensive or you have been diagnosed with a condition that will affect your ability to find insurance, group insurance is a great alternative. The less-stringent underwriting guidelines make it possible for people who may not be able to get insurance on their own to purchase at least some protection.
- Quick Issuance
Some individual policies can take 30 to 60 days to underwrite and then issue. If you want immediate protection, it is nice to know that most group policies are issued in days when the benefit is made available to you. No checking on the status of the insurance or worrying about being denied.
- Paid For with Before-Tax Dollars
There is nothing worse than letting your policy cancel because you overlooked a payment due date. This is possible with an individual policy but not with a group policy. Group premiums will come directly out of your paycheck and are paid for with your before-tax gross earnings, which may also be called a pre-tax payroll deduction. This means that you can actually lower your tax bracket and ultimately lower your taxable income by paying for coverage that you need either way. You get the coverage that you need and the federal and state government takes a smaller share in the process. You also do not have to worry about lapses or making payments during your free time.
What is your tax liability when you carry group life insurance?
As you can see, there are some major benefits to working for a company that offers their employee base great life benefits. With the benefits become other drawbacks that might not apply if you shop for your own plan. One of the drawbacks may be your tax liability as the employee. The tax implications between group term life and individual term life are very different. When buying an individual policy, you will never be taxed on the benefit that you carry. While you are not always taxed for group benefits, in some scenarios you can be.
Why Individuals Life Policies Are Not Taxable
When you carry an individual life insurance plan, you are the party who chooses which carrier to apply through. You are also the owner of the policy and can make changes as you please. One major difference when it comes to tax liability is that you will not pay taxes on the benefit each year that the policy is in force. This is because you paying the benefit on your own with after-tax dollars that is not affecting what the government can stake claim to. The benefit that you receive is also not employer-sponsored, which plays a significant role in why there is no need to worry about some or all of the benefit being added as taxable income.
Why is group life insurance classified differently?
In terms of tax liability, group life insurance is classified differently because of how the premiums are paid. When you are shopping for life insurance through your employer, you receive discounted wholesale rates because the employer is buying in bulk.
Some of these discounted premiums are paid by the employer and the remainder is deducted from the employees check with pre-tax dollars.
This is what really differentiates group life from individual life in terms of tax liabilities. Since pre-tax dollars are used, there is a tax liability that will lie with the employee in certain scenarios. The imputed cost of the group coverage that is carried by the employer will be subject to both Medicare and Social Security taxation.
Scenarios Where Group Term Life Insurance are Taxable
Group Term Life Insurance, also known as GTLI, is only considered to be a tax liability for the employee who is receiving the benefits when the coverage limit is in excess of the limit set by the Internal Revenue Service. According to section 79 of the IRC, the IRS will exclude the first $50,000 when considering the taxability of the benefit.
When the employer-provided benefit is in excess of this $50,000 limit, the remainder will be subject to taxes and will be included in income for the tax year. Any benefit that is given to the employee’s spouse or children is subject to taxes if it exceeds a lower limit of $2000. It is important to realize that benefits that exceed the $50,000 or $2000 limits are not fully taxable.
How is the taxable portion of the GTLI calculated?
If you are interested in calculating how much of your group life benefit will be considered income, there is a basic formula that you can use. Your employer may give you a W-2 at tax season, but doing the math on your own will help you decide if it is best to get your own insurance or to still take advantage of the employer-sponsored benefit. Here are the steps that you need to take to calculate the taxable portion of your GTLI benefit:
- Determine what the excess amount is by subtracting $50,000 from your benefit
- Divide this excess amount by 1000
- Use the age-appropriate value tax table to determine the value per thousand
- Once you locate the value, multiply this value by the result of step 2
- Multiply this result by the number of months you received coverage
- Subtract any of the after-tax paid during the tax year from the figure
The final number will be the amount that will be added to the employee’s income for the tax year. This is the same number that will show in your W-2 when they are sent out in late January the following year.
Other Drawbacks of Group Life
Tax liabilities are one of the drawbacks of group life plans. Unfortunately, there are other drawbacks to consider. Some plans are very limited in what the benefit can do for the beneficiaries. Some plans may offer only accident coverage, which does not apply if the insured falls ill from a medical condition. Another drawback is that your employer owns your policy.
If the company wants to cut costs, they can eliminate this benefit at any time, leaving you uninsured.
It is good to take advantage of benefits, but you should always have your own individual policy as well. If you do not currently have a plan of your own that you own, you should start to price the cost of even a small term insurance plan. If you are healthy and you are still young, you can buy a good policy for cheap. Use an online rate comparison tool and see just how much your own policy will cost you. Start comparing life insurance rates now by entering your ZIP code in our FREE tool below!
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