Does your employer provide group term life insurance? If so, it’s usually a good idea to accept and even add to this insurance policy. But in doing so, Did you ever wonder ” Is Group Term Life Insurance Taxable?” Let’s dive in to learn everything you need to know about paying taxes on your group term life insurance policy.
What Is Life Insurance? Is Group Term Life Insurance Taxable
Life insurance policies ensure the insurance company will pay an amount of money to the listed beneficiaries when the insured (policyholder) dies. This is a death benefit.
The insured pays premiums while they are alive. They can pay a single lump-sum premium or regular premiums over time.
Types of Life Insurance
There are two classes of life insurance. The first is term life insurance.
Term life insurance lasts for a certain number of years, then ends. Standard terms are 10, 20, or 30 years.
You choose the term when you take out the policy. There are three types of term life insurance to choose from. They are:
The second primary type of life insurance is permanent insurance. The policy remains active for the policyholder’s entire life unless they stop paying the premium or surrender the policy.
There are four types of permanent life insurance. They are:
- Whole Life
- Universal Life
- Indexed Universal
- Variable Universal
Permanent life insurance is usually more expensive than term life insurance.
What Is Group Term Life Insurance?
Group term life (GTL) insurance covers a group of people rather than an individual. Employers offer this popular insurance policy as part of their employee benefits package.
You can check your paycheck and pay stubs to see if your employer deducts GTL insurance each month.
Your employer sets the amount of coverage you have. Employers occasionally choose a multiple of your annual salary for your coverage.
Sometimes you have the option to buy additional coverage at your own expense.
GTL insurance is not permanent. It remains in place as long as you’re working for your employer or up to a specified term determined by the policy.
If you leave your job, you’ll lose coverage. You might have the option of converting the GTL insurance policy to an individual term life policy. But, this isn’t always the case.
How Is GTL Insurance Different From Other Life Insurance Policies?
GTL is a form of term life insurance. But, the employer takes out the policy on behalf of their employees.
Regardless of which type, those who take on a life insurance policy of their own usually take out an individual policy. Therefore, it is not part of their employment but a separate expense.
It’s possible for more than one person to take out a policy together. For example, a couple might take out a policy that would benefit their children when they die.
As you can see, GTL insurance is a type of policy that fits into the broad category of life insurance.
Further, employees cannot use their GTL insurance plan to get a policy loan.
Insurance companies can issue policy loans to policyholders. The loans use the cash value of someone’s life insurance policy as collateral. They are a good way to access cash in the event of an emergency for a reasonable interest rate.
However, you can only get a loan policy on whole life or universal life permanent life insurance policies.
GTL Insurance vs. Key Person Insurance
Key person insurance is another type of life insurance policy for businesses. It covers:
- The business owner
- A top executive
- A person considered critical to the business
The death benefit of key person insurance is a financial cushion. It buys the company time to find a new person or implement other strategies to save the business.
This is because the person’s absence would cause significant financial harm to the company. When the policyholder of key person insurance dies, the company receives the death benefit. The company can use the money to find a replacement. This includes:
If the company is going to shut down, it can use the funds to:
- Pay off debt
- Distribute money to investors
- Give employees severance benefits
- Close down properly rather than declaring bankruptcy
Other names for key person insurance are:
- Key man insurance
- Keyman insurance
- Key woman insurance
- Business life insurance
Benefits of GTL Insurance
There are several advantages to GLT insurance for employers and employees. First, it helps businesses to attract and retain talent. It also makes them competitive against other companies.
Employers can bundle life insurance with other insurance plans, such as health. Bundling policies makes them cheaper. The inexpensive cost of GTL insurance is one reason so many employers include it in their employee benefits.
Since it’s part of their compensation package, it’s easier to get life insurance for employees.
Even when you’re getting older and not in perfect health, you can still access life insurance for a great premium rate through your employer.
Plus, receiving GTL insurance from your employer is usually cheaper than buying an individual life insurance policy. A GTL policy is a fringe benefit. That means employers who offer the insurance pay all or most of the cost of coverage (up to a certain amount).
This creates more financial security for employees, especially if they don’t have another life insurance policy.
Even if $50,000 is not enough coverage for you, often you have the option to pay for more coverage. You’ll at least receive $50,000 in coverage tax-free.
Additions to a GTL insurance policy vary between insurance companies and employers. Some common examples include education allowance, repatriation allowance, and accidental death.
How Does the IRS Tax GLT Insurance? (Is Group Term Life Insurance Taxable)
Group term life insurance is usually tax-free for employees up to a specific amount. Lets learn about Taxes on Life Insurance.
Tax.-free means you don’t owe income taxes at all. This is different from tax-deductible. When something is a deductible, you can claim a deduction on your taxes for contributions. Deductions reduce your taxable income.
If your employer provides coverage of more than $50,000, the excess amount is a non-cash fringe benefit. The premiums for the extra amount become taxable income for the employee.
Again, you can find the taxable benefit on your paycheck or pay stub.
Additionally, when you receive your W-2 Form at the end of the year, it will show the total cost of taxable GTL insurance you received.
You can find the amount in box 12c of your W-2. It’s also included in your income for boxes 1, 3, and 5.
Tax Responsibilities for an Employee’s Spouse or Dependents
Often, you can extend an employer-provided GTL policy to cover your spouse and other dependents. This is great, but it can increase your tax obligations.
If your GTL insurance premiums on coverage for your spouse or dependents are more than $2,000, it could be taxable income. When the coverage exceeds $2,000, the entire premium amount becomes taxable.
This is different than your GTL insurance, where the first $50,000 is tax-free.
Premiums under $2,000 remain tax-free.
Calculating Taxable Premiums
The IRS uses a specific table to determine the cost of excess coverage. The amount is based on the employee’s age. The cost is per $1,000 of life insurance coverage each month. It goes as follows:
- Under 25 — $0.05
- 25-29 — $0.06
- 30-34 — $0.08
- 35-39 — $0.09
- 40-44 — $0.10
- 45-49 — $0.15
- 50-54 — $0.23
- 55-59 — $0.43
- 60-64 — $0.66
- 65-69 — $1.27
- 70 and older — $2.06
Let’s look at an example. You’re 50 years old, so your premiums are calculated at $0.23 per month or $2.76 per year for every $1,000 in coverage.
Your employer offers you $100,000 in total coverage. This means you have $50,000 that is tax-free and $50,000 that is taxable.
First, divide the excess by $1,000.
$50,000 / $1,000 = 50
To identify the taxable income, you multiply the premium amount by 50.
$0.23 x 50 = $11.5 (per month)
$2.76 x 50 = $138 (per year)
Now you can see your tax responsibility on the excess coverage. However, you may not need to pay the total amount. You may have already paid some of the cost through payroll deductions.
You can verify how much you owe with your tax consultant or your company’s finance department.
Reporting GTL Insurance Tax
If you only receive $50,000 in coverage, you don’t need to worry about reporting GTL insurance on your tax return.
For those receiving more than $50,000, you can report the amount as taxable income on IRS Form 941 and Form W-2.
Form 941 is the Employer’s Quarterly Federal Tax Return. However, at times, you need to add it to Form 944, the Employer’s Annual Federal Tax Return.
To report the amount on a W-2 Form, fill in the amount in boxes 1, 3, 5, and 12.
Box 1 is for wages, tips, and other compensation. Box 3 is for Social Security wages. Box 5 is for Medicare wages and tips.
In Box 12, use code “C” with the amount.
Get Life Insurance Coverage
If your employer offers group term life insurance coverage of $50,000, you’re receiving free coverage as part of your compensation package. There are no negatives to taking it.
Anything over $50,000 could come with tax responsibilities. But, often, it is still less expensive to choose this option than to take our own life insurance policy. Speaking with a qualified tax professional will help you determine how much tax you need to pay on your GTL insurance.
Now that you learned more about “Is Group Term Life Insurance Taxable?,” To read more about taxes, check out the Taxes section. You’ll find more credible information to help plan for your tax bill.