Is employer provided life insurance taxable?

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Here's what you need to know...
  • Employer-sponsored life insurance is offered as a benefit through a private or public company and is also known as group life insurance
  • Group life insurance premiums are either partially paid for by the company or paid for in full as a benefit
  • The employer will be limited as to how much coverage they’ll be eligible for under the group life insurance plan
  • One major benefit of group life insurance is that employees can’t be denied coverage because pre-existing conditions
  • Group life insurance can become a taxable fringe benefit through the IRS if coverage exceeds $50,000
  • Premiums for coverage that exceeds the fringe benefit limit will be treated as taxable income

When you are offered a job, it only makes sense to review the benefits packages that’s offered by the employer. Benefits like paid time off, medical insurance, dental insurance, vision insurance and group life insurance are just some that can be found in a comprehensive package offered by an employer that believes in taking care of their employees. While some are tempted to take a larger salary in lieu of benefits, a compensation package that features benefits can increase your salary by 18 to 26 percent.

When you take a job offer that chalked full with benefits for life insurance coverage, you’re excited to say the least. What you’ll need to know is that, depending on how the group insurance is set up and how much coverage is offered, you could be taxed for this employer-sponsored benefit. Make sure you shop around first and you can do so by using a comparison tool. Start comparing life insurance rates now by using our FREE tool above! If you’d like to know the tax implications of carrying life insurance directly through your employer, read this guide so that you can decide if the benefit is worth it.

What is employer-sponsored life?

Group life insurance is a plan that is either directly or indirectly purchased by an employer, union or other type of professional association at a wholesale rate. In order to qualify for this type of discounted insurance coverage, an employer must have several employees that are all eligible for the benefit. Since the company is the one to choose the carrier and choose the plan, they are the owner of the insurance and have complete control over changes that may be made.

What’s the difference between group life and individual life?

Individual life insurance is a product that anyone can buy regardless of where or if they’re employed. When you buy an individual policy, you won’t pay wholesale rates and your employer won’t pay some or all of your premiums. have the power to choose which carrier you buy coverage through and you will be the owner of your policy.

With an individual life insurance plan you will have the power to choose which carrier you buy coverage through and you will be the owner of your policy.

Consumers purchasing individual life policies are also free to choose a reasonable death benefit. Unlike group life, the coverage provided by an individual plan won’t end if the insured leaves their job, retires, or goes on disability. One major advantage of electing to carry a group life policy is that you can’t be denied coverage because of a medical condition, hazardous occupation or dangerous hobbies.

Is group life insurance taxable?

There’s also another major difference between individual and group life insurance and that difference is related to tax liability. Since you’re the one that’s paying the for premiums for your own individual policy, you don’t have to worry about any tax implications each year as you pay to keep the policy active.

You may, however, be responsible for paying taxes on some or all of the life benefits you receive through your employer because it’s part of your compensation package. These benefits are referred to as fringe benefits but fringe benefits aren’t always taxable. This is something that can totally change the value of the group life insurance benefit.

When is employer-sponsored life taxable?

In order for your life insurance offered by your employer to be taxable as income, certain conditions need to be met. First, the actual death benefit that the employee receives through the policy must exceed $50,000.

If the plan doesn’t exceed this $50,000 threshold, regardless of all of the other details, the premiums aren’t taxable.

If more than $50,000 in coverage is purchased, tax liability then falls on how the premiums are paid. If the employee pays for the entire cost of pure life insurance, there will be no tax consequences at all because no fringe benefit exists. If, however, the employer pays for a portion of the premiums and the benefit is in excess of the threshold, these premiums will become income to the IRS.

How is the tax liability calculated?

The taxable portion of your group life insurance will be labeled on line 14 of your W-2 for tax filings as ‘additional income’ or ‘additional compensation’. While that’s the easy way to learn how much of the premiums paid will be income, you might be interested in calculating this figure on your own to see if you should buy group life.

To calculate the taxable portion, you’ll need to use IRS Table 1 that’s determines the value of imputed income. This table shows you the cost of $1000 of excess coverage based on the employee’s age at the time so that they are able to make the calculations on their own.

Example of How Group Life Premiums Are Taxable

A 30-year old employee by the name of John receives $150,000 in life insurance benefits from his employer. He pays a total of $26 per year for his portion of the premium. To calculate the taxable fringe benefit, you’ll subtract the $50,000 coverage from the total amount. Then, you’ll calculate the annual cost of remaining $100,000 by using the imputed income table. For a 30-year old, the yearly cost of coverage for $100,000 would be $96. John would then subtract the $26 he pays and the taxable income added would be just $70 for the year.

Other Factors You Need to Know about Group Life

For younger employees and for individuals who don’t receive high benefits, the taxable income won’t be much. You should know, however, that having only group life can put you at risk of being uninsured.

When you don’t have your own individual coverage, losing your job could mean losing your insurance.

Since most group plans aren’t transferable, you’ll be stuck without insurance during a stage in your life where you won’t qualify for coverage. This is why you should always view a group life benefit as a supplemental benefit and not a primary one.

If you currently don’t have individual coverage, it’s time to start shopping for a plan that you can lean on. You never want to be in a situation where you assumed you were protected and you really weren’t. Individual premiums are higher than group premiums, but not by much when you’re in good health and when you shop around. Use an online rate comparison tool to see how many carriers in the marketplace are charging for sizable death benefits and you can see just how affordable buying your own coverage can be. Start comparing life insurance coverage now by entering your zip code in our FREE tool below!

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