For individuals with dependent family members, life insurance can serve as the foundation of a long-term financial plan. Life insurance, however, is not always purchased through an individual policy. Employees seeking to obtain life insurance may be able to secure some or all of their coverage through a group life insurance plan sponsored by their employer.
A group life insurance policy provides coverage only to members of a specific organization or entity. If your company offers group life coverage, there may a probationary period of employment required before you can enroll. The underwriting criteria is based on the group as a whole. As a result, it is generally easier to obtain group life insurance than it is to obtain a new individual policy.
The coverage provided by group life insurance is largely determined by your employer, who is the actual policyholder. Group life insurance is typically a term plan, so the coverage is on a year-to-year basis. Because of the influence of tax regulations, group life insurance is often used as a supplement to an individual life insurance policy.
Tax benefit limitation
Group life insurance is one of several types of tax-advantaged fringe benefits companies may offer in lieu of wages. The insurance expense paid for coverage of up to $50,000 is not considered taxable income to the employee. In addition, you also have no payroll tax on the allowable fringe benefit. An even larger amount of insurance coverage can be provided, but the additional coverage loses its tax advantage.
Coverage in excess of tax limitation
If your employer pays for the cost of group life insurance coverage in excess of $50,000, the cost for that additional coverage must be included in your taxable income. The added taxable income is also subject to Medicare and Social Security taxes. Instead, your company may allow you to pay for the excess coverage yourself with ongoing payroll deductions from taxable earnings.
Coverage for family members
A smaller tax-free fringe benefit is available if group life insurance is provided for your spouse or dependents. As long as the face value of life insurance on your spouse or a dependent is not in excess of $2,000, the premium paid by your company is not taxable income. Plan participation is controlled by the sponsoring organization, so specific offerings are likely to vary among different companies.
Some fringe benefits are offered on a cost-sharing basis. A company may choose to require all participants in a group insurance plan to pay a percentage of the insurance costs. Cost-sharing provides an incentive to the employee while also reducing expenses for the employer. Contact an insurance agent for advice on determining your appropriate level of life insurance coverage.