Four Things You Need To Know About Group Life Insurance

Marlene Badai |

My work with Life Insurance began after I left Merrill Lynch, driven by my desire not to have my clients fall into the same situation I did. I didn't realize that leaving Merrill Lynch would leave me without Life Insurance, with two children and a mortgage. At this point, I was 39 and thankfully in good health. It was not until I left my group insurance through work that I discovered I needed to convert the insurance at my current age and health conditions. Nor did I realize how much whole life would cost! My husband and I chose a term policy for 30 years to get us through the mortgage time frame and my children's college years as just that - insurance that would cover those expenses should either one of us die prematurely. The premium payments and our mortgage payments took priority while I was building my business (yes, there were many other late payments at that time). I knew life insurance would be a fundamental part of my business - to empower others with the knowledge to make informed decisions. 

One of my first Life Insurance applications taken was a husband who recently lost his job and did not realize he would lose his Life Insurance coverage with it (sound familiar?). My new client with a young family eagerly signed the papers and said, "To me, this is the single most selfless act I can do for my family." Wow - that quote sticks with me to this day. 

This group Life Insurance conversation is essential and the second in our Series of Life Insurance Basics.

Group Life Insurance is a term life insurance benefit provided by your employer at no cost to you. The employer is the policy owner and pays the premium for a single contract that provides a life insurance benefit to its employees. The premium is income tax deductible by the employer as an ordinary business expense.

Companies frequently offer the benefit as a multiple of the employee's annual income. One or two times annual income is common. No medical questions are asked, no medical exam is required, and the employee chooses the beneficiary.

Some group plans have a supplemental group life insurance benefit. This benefit allows the employee to purchase coverage in addition to the benefit paid for by the employer. Often, the supplemental group life insurance premium is higher than the premium for an individually owned term policy.

It's not uncommon that the employee would have to prove insurability for an additional benefit. If a derogatory medical history exists, the insurance company retains the right to decline the purchase of additional coverage.

As with all financial instruments, Group Life Insurance has income tax implications. Active and retired employees are not charged any income taxes on the premium paid by the employer for the first $50,000 of benefit. However, IRC Code Section 79 states that the premiums paid on death benefits over $50,000 are considered an economic benefit to the employee, and a portion of the premium paid by the employer is income taxable to the employee. The IRS Uniform Premium Table (Table I) calculates the taxable income.

If a death benefit is paid, the beneficiary does not have to pay any income tax on the proceeds.

Group Life Insurance will terminate at an age designated in the group plan document or if the employee leaves the company's employ. In either case, the insurance company may offer the opportunity to convert the group coverage to a whole life plan without proving insurability. Generally, these policies have high premiums, and only people with health issues take advantage of this option.

The only caution about Group Life Insurance is relying on it as a significant component of your life insurance planning. Remember, you lose the benefit when you leave the company, and you may find yourself moving to a company that doesn't offer a benefit. In addition, if you have to replace it with individual coverage, that coverage will not be free, or your application may be declined if you are in poor health.

The popularity of Group Term Life Insurance continues to grow, with about 68% of US households now insured by an employer-sponsored plan. Enjoy it as a free company perk with minimal income tax implications.



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