Group life insurance is an important part of the life insurance industry, accounting for about 40% of all life insurance in force by amount with an average certificate of $32,000.
While the minimum size of a group was typically 50 lives a few years ago, it is now usual for states to require a minimum of 10 lives required by state law and by insurance companies. The larger the group, the less expense per person is incurred.
Generally, only active, full-time employees are eligible for group coverage, usually specified by occupation classification of those that must be included in the group, such as “salaried employees” or “all hourly employees.” The employee must be actively at work for a normal number of hours per week (usually 30 hours) at the employee’s regular job at the date the employee becomes eligible for coverage.
Employees usually have a probationary period, usually one to six months, during which they are not eligible for coverage. After this period, under a contributory plan (the employee pays part of the premium) the employee has an eligibility period in which they must apply for insurance without submitting evidence of insurability. This period is usually for 30, 31 or 45 days. If the plan is noncontributory, then there is no eligibility period as all employees automatically go on the plan when they have completed the probationary period.
The coverage period is usually the length of time that the employee remains with the employer (assuming the plan stays in force with the employer and the employee pays their share of the premium, if any). The employer has the right to continue coverage for an employee temporarily off the job and upon termination, coverage is usually afforded for 31 days.
Typically, the employee does not specify the benefit amount and the amount is usually (1) a set amount for all employees, (2) a percentage of the employee’s income with the employer, (3) an amount that is designated for the position the employee holds (job title), or (4) a function of the employees length of service. Insurers do not usually write insurance for less than $2,000 on an employee, most companies require $5,000 or $10,000, or more. Most companies allow for additional insurance over the normal maximum with evidence of insurability.
Employees usually have the option to convert their group life policy into an individual cash value policy within 31 days after termination of employment or after the employee ceases to be a member of an eligible position. The death benefit is paid under the group policy within 31 days after the insured has withdrawn from the eligible group.
A typical waiver of premium is used with group life insurance plans, and the premium will be waived as long as the insured can prove disability periodically.
Group life insurance is basically yearly renewable terminsurance. Group premiums are paid monthly, except with some small groups when premiums may be paid quarterly. Premiums are usually guaranteed for one year only, but often for competitive purposes, the premiums are guaranteed for a longer period of time.
For contributory plans employee contributions are usually at a set rate per $1,000 of coverage at all ages. In most states, employers are required to pay at least a portion of the premium, and some states restrict the amounts that can be paid by any one employee, commonly 60 cents per month per $1,000 of coverage, or 75% of the total premium for that employee.
Supplemental life insurance may be provided to employees, normally contributory and the amounts of insurance available are banded. Generally the maximum is a multiple of the employee’s salary. (Note: As discussed later, it may be treated differently for tax purposes.)
A common form of group insurance is Credit Life insurance, which provides a benefit that is equal to the unpaid amount owed to the institution by the consumer. The creditor, which is usually a bank or a finance company, is both the policyowner and beneficiary of the policy. Premiums are usually paid by the debtor, but if there are dividends, they are paid to the creditor. Needless to say, group credit life can be very profitable to the lender and there has been considerable abuse. States have reacted and most states now have maximum rates that can be charged and most, if not all, states do not allow the purchase of credit life insurance to be a prerequisite for obtaining a loan.
Group life insurance often includes an accelerated death benefit which pays a portion of the face amount of the policy in case of the terminal illness of the employee.
Usually, the taxable value of group term insurance in excess of the $50,000 exclusion amount is determined from tables provided by the IRS. The exclusion is not allowed unless the insurance meets the requirements of "group term life insurance" (as described below). If the insurance provided does not meet the definition of group term life insurance, then the employer's premium cost is included in the employee's income.
If the group term plan is discriminatory, the exclusion is not available to key employees and the taxable cost to the key employee of the entire amount of insurance under the discriminatory plan, is the higher of the actual cost or the cost under the IRS table as discussed later.
Generally, the premium paid by the employer is deductible. Group term life insurance may be provided under term policies or under policies providing a permanent benefit and an employer may also provide permanent life insurance to employees on a group basis.
Unless the life insurance that is provided by an employer meets certain requirements, it is not considered group term life insurance and does not qualify for the special tax exclusion by employees.115 There are four requirements (discussed below):
The policy must provide a general death benefit, excludable from gross income. Travel insurance and accident and health insurance (including double indemnity) do not provide a general death benefit.
The insurance must be provided to a group of employees as compensation for personal services performed as an employee. A group of employees consists of all employees of an employer, or fewer than all if membership in the group is determined solely on the basis of age, marital status, or factors of employment (such as members of a union, duties performed, etc.) The purchase of something other than group insurance is not a "factor of employment," while participating in an employer's pension or accident and health plan is a "factor of employment." Ownership of stock in the corporation is not a factor, but ownership in an employer's stock bonus plan may be. The "group of employees" may include stockholder-employees, except the more-than-2% shareholders in an S corporation.
The regulations are quite specific as to the difference between an "employee" and an independent contractor. Insurance on the life of a self-employed person, whether he is the employer or independent contractor, is not excludable (meaning that it does not qualify for the tax exclusion), nor is the insurance for a partner or sole proprietor, nor insurance provided for an individual in his capacity as a corporate owner or director. Insurance on a commission salesperson is not excludable unless an employer-employee relationship exists between the sales person and the company that pays the premiums. However, full-time life insurance salespersons that are classified as employees for social security purposes are considered as employees for group term insurance.116
The insurance must be provided under a policy carried directly or indirectly by the employer, such as where the employer pays any part of the cost—directly or through another person—or makes arrangements for payment by employees and charges at least one employee less than his Table I cost and at least one other employee more than his Table I cost. The "policy" can be a master policy or a group of individual policies.
The IRS considers a "policy" as including all obligations of an insurer that are offered or are available to a group of employees because of the employment relationship, even if they are in separate documents.117 The employer may elect to an obligation to employees to providing permanent insurance as a separate policy if (a) the employee buys the policy directly from the insurer and pays the full premium; (b) the employer only participates by selecting the insurer, the type of coverage and sales assistance (providing list of employees, for instance); (c) the coverage is sold on the same terms and in substantial amounts to individuals who do not purchase, and (d) whose employers do not purchase any other obligations from the insurer; and no employer-provided benefit is conditions on purchase of the obligation.
If supplemental group term life insurance is paid for entirely by employees and the supplemental insurance and the basic group term life is paid for by the employer, they are considered the same policy if they are provided by unrelated insurers. However, if these benefits are provided by the same insurer, the supplemental and basic coverages are treated as one policy.118 Actually, if the premiums are allocated properly, the employer may elect to treat the coverage as three separate policies—basic coverage, supplement smoker coverage and supplement nonsmoker coverage—for the purpose of determining if the policies were carried directly or indirectly by the employer. Therefore, the employees had no imputed income from the supplemental coverage.119
The amount of insurance that is provided to each employee must be computedunder a formula that precludes individual selection of such amounts. In other words, it must be a guaranteed issue plan. The formula must be based on age, years of service, compensation or position, however, employees may have the right to determine the amount of insurance depending upon the amount that the employee wishes to contribute. Regardless, though, the amount of insurance on each schedule must be computed under the formula that precludes individual selection.
One place this could come into contention is when the employee's insurance protection under the group program is reduced by his death benefit under the employer's pension plan, then a court determined that the "group" protection was no longer group term life insurance because the formula for determining the amount was based on a factor other than age, years of service, compensation or position.120
An employer may select payments of equal installments over a fixed period of time instead of being paid in a lump-sum, in which case, this would not affect the plan's qualification as group term life insurance.
Term life insurance to be provided after retirement, which is offered by certain educational institutions under a Cafeteria Plan, is treated as group life insurance.
If the employer-provided term life insurance does not qualify as group term insurance, the premium paid by the employer is includable in the employee's income.121
Generally, life insurance provided to a group cannot qualify as group term insurance for income tax purposes unless, at some time during the calendar year, it is provided to at least 10 full-time employees who are members of the group of employees of the employer. However, insurance for fewer than 10 employees can also qualify if (a) the group term life insurance is provided for all full-time employees; (b) the amount of coverage is calculated as a percent of compensation or on some other acceptable compensation bracket; and (c) eligibility and coverage amount are based on evidence of insurability determined only on the basis of a medical questionnaire completed by the employee and not requiring a physical examination.
In order to determine how many, and if all eligible employees, are included in the group, employees who elect not to be covered are considered as included even if they would have to contribute toward the cost of the term insurance. However, if the employee is required to provide the cost of benefits other than term insurance (such as permanent insurance) in order to get term insurance, he is not counted in determining if term life insurance is provided to ten or more employees if he declined the term insurance.123
Also, if evidence of insurability is not to be taken into consideration, then insurance that would otherwise not meet the requirements and which provides coverage for less than ten full-time employees, can still qualify provided it is provided under the same plan to the employees of two or more unrelated employers, and insurance is restricted to all employees (but not mandatory) of an employer who belong to or are represented by an organization that carries on substantial activities other than obtaining insurance (e.g., union).
For plans for less than 10 full-time employees, insurance will not be disqualified simply because the policy terms require 10 employees and no insurance is provided for those employees less than 6-months or are part-time employees (less than 20 hours per week or five months in any calendar year) or those of age 65 or older.124
In order to determine as to how many employees are provided insurance, all life insurance provided by policies that are carried by the employer are taken into consideration, even if they are written with different insurers. This allows, for instance, supplemental coverage on fewer then 10 employees to be superimposed on group term life insurance that has more than 10 employees without considering the special requirements for groups under 10 lives.125
The premiums paid by an employer for group term insurance on the lives of employees are deductible, even if the plan discriminates in favor of key employees.126
A corporation may deduct the premium it pays for coverage on the lives of commission salespersons irrespective of whether an employer-employee relationship exists between the salesperson and the corporation.
No deduction will be allowed for the cost of coverage on the life of an employee if the employer is directly or indirectly a beneficiary under the policy (such as some key-employee policies). Also, if the group term proceeds are to be used to fund a buy-sell agreement between stockholders of the corporation, the IRS may not allow a corporation to take the premiums as a business expense deduction. In any event, contributions will not be deductible unless, when considered with all the employee's other compensation, they are reasonable.
If the deductions of premiums are paid to a "welfare benefit fund" to provide group life insurance to employees, there are several and strict limitations, and which are detailed and complex, requiring expert tax advice.127
As a general rule, the cost of up to $50,000 of group term life insurance coverage is tax exempt and the cost of coverage in excess of $50,000 is taxable to the employee. If the employee is working for more than one employer, he must combine all group term coverage and exclude the cost for no more than $50,000 of coverage. If the employee contributes toward the cost of insurance, all of his contribution for amounts up to $50,000 and any excess coverage, are allocable to coverage in excess of $50,000—he may subtract his full contribution from the amount that would otherwise be taxable to him. Carryover from year to year any unusual portion of the contribution is not allowed.128
The cost of coverage in excess of $50,000 must be calculated monthly by finding the total amount of group term life insurance for the employee in each calendar month of his taxable year, subtract the $50,000 from each month's coverage, and to the balance (if any) for each month, apply the appropriate rate from the following table (called Table I) of monthly premium rates, from which is subtracted the sum of the total employee contributions for the year, if any.129 The cost is determined on the basis of the life insurance protection provided to the employee during his tax year, without regard to when the premiums are paid by the employer.
TO COMPUTE THE COST OF EXCESS GROUP TERM INSURANCE:
Uniform Premiums for $1,000 of Group Term Life Insurance Protection
Rates Applicable to Cost of Group-Term Life insurance
5-year age bracket Cost per $1,000 of Protection
for one-month period
Under 25 $0.05
25-29 .06
30-34 .08
35-39 .09
40-44 .10
45-49 .15
50-54 .23
55-59 .43
60-64 .66
65-69 $1.27
70 and above 2.06
(In using this table, the age of employee is attained age on last day of his taxable year.)
The IRS regulations consider the fact that state laws may differ in amount of insurance in excess of the $50,000, and the exemption is not available for amounts over $50,000, regardless of state law. The employee will be taxed on the actual premium for any coverage exceeding the state maximum.130
Group term life insurance on the lives of an employee's spouse and dependents is not included in the exemption, but the cost of such coverage will be exempt from income tax if the face amount does not exceed $2,000. When determining whether coverage in excess of $3,000 is excludable from income, only the excess of the cost over the amount the paid by the employee on an after tax basis for the coverage is considered.
There are exceptions where the cost of group term insurance for over $50,000 is tax exempt to a former employee who has terminated his employment with the employer and has become permanently disabled, or terminated on or before Jan. 1, 1984, or, if a charitable organization is designated as beneficiary, or, if the employer is the beneficiary (except if the employer is obligated to pay proceeds over to the estate of the employee).
Usually, contributions made by an employee toward group term life insurance reduce the amount included in his gross income, on an equal-dollar basis. Prepayment by the employee for coverage after retirement may not reduce the gross income,
The exemption of the cost of up to $50,000 of group term life does not apply to group term insurance that is purchased under a qualified employee's trust or annuity plan, such amounts for the protection purchased under a qualified plan does not allow for any part of such cost to be excludable from the employee's gross income.
Premiums for supplemental insurance in excess of the $50,000 provided by the employer under a group term insurance plan, are not taxable to the insured employee when paid by a family member to whom the employee has assigned the insurance. But, if the cost of that excess coverage is shared by the employer and the assignee, then the employer's portion of such costs must be included in the insured employee's gross income.132
A former employee who has terminated his employment with the employer and has becomes permanently disabled, or a charitable organization designated as a beneficiary, or if the employer is beneficiary (unless the employer is required to pay the proceeds over to the employee's estate or beneficiary), then the entire amount of group term life insurance is tax exempt.
If the insurance is purchased under a qualified employee's trust or annuity plan, then none of the cost is excludable from the employee's gross income as separate regulations apply to the cost of such protection under a qualified plan.132
If the plan covers any "key employees" and it discriminates in favor of them as to eligibility, kind of benefits or amount of benefits, the key employees may not exclude the cost of the first $50,000 of coverage and the key employee must include the higher of either the actual cost or the specified uniform premium (from Table I). Other employees, other than key employees, may exclude the cost of the $50,000 of coverage even if the plan is discriminatory.133
For this purpose, a "key employee" is an employee who at any time during the employer's tax year was
In respect to eligibility, a plan is discriminatory in favor of key employees unless it benefits at least 70% of all employees of which 85% are not key employees, the plan benefits a class of employees determined by the IRS not to be discriminatory, or if the plan is part of a Cafeteria Plan—then the requirements for the Cafeteria Plans are met.
Employees who do not need to be counted include those with less than 3 years of service, part-time or seasonable employees, employees excluded from the plan because they are part of a collective bargaining plan, or certain nonresident aliens.134
Benefits may be considered as discriminatory unless all of the benefits that are available to key employees are available to all participants. Benefits will not be discriminatory just because the insurance amount bears a uniform relationship to the total compensation of the employees, or to their basic or usual rate of compensation.
A plan established by a church or convention of churches or association of churches that is tax exempt is exempt from non-discrimination requirements. A church employee includes the minister or pastor, or an employee of an organization that is tax exempt, but does not include an employee of an educational organization above the secondary level (other than a school for religious training) or an employee of certain hospital or medical research organizations.135
Under a group carve-out plan, an employer removes (or "carves-out") one or more highly compensated employees from the life insurance coverage by a group term life insurance policy and such "carved-out" employees are provided life insurance coverage through individual policies. This plan has become quite popular because there are low term insurance rates on individual policies and lower minimum premiums on permanent policies, plus the portability of the plan makes it attractive to highly-compensated executives who are those who are usually asked to participate.
The purchase an ownership of the individual life insurance policies are often structured in different ways, such as including a split dollar arrangement, an IRC Section 162 bonus plan or a death benefit-only arrangement.
Under this type of plan, the income tax consequences to both the employer and the carved-out employees are the same as if the alternative method of providing life insurance was available independent of the group term plan. However, the IRS decided that a split dollar plan that was part of a group carve-out plan should be taxed as group term life insurance, thereby measuring the benefit to an employee according to Table I rates instead the insurance rates used with the split dollar arrangement.
If the policy provides for a permanent benefit, it may be treated as group term life insurance only if the policy or the employer identifies in writing the part of the death benefit that is provided to each employee that is group term life insurance. Further, the part of the death benefit that is so designated as group term insurance for any policy year is at least the difference between the total death benefit under the policy, and the employee's "deemed" death benefit at the end of the year. The "deemed death benefit" is calculated through a mathematical formula using the net level premium reserve (a function of the actuarial department).
A permanent benefit is an "economic value extended beyond one policy year … that is provided under a life insurance policy." 136Further, if a policy that provides group life insurance also provides permanent benefits, the cost of the permanent benefits reduced by the amount paid for them by the employee, (excluding any group term life insurance) is included in the employee's income (according to a rather complicated formula).
Suffice it to say that if the policy has permanent benefits, the tax treatment of the premium is so complicated that it requires an actuarial or accountant (preferably tax accountant) to determine.
The employer can deduct the premiums that he pays on group permanent life insurance for his employees if the employee's right to the insurance on his life is nonforfeitable when the premiums are paid. However, if the employee has only a "forfeitable" right to the insurance, the employer cannot deduct the premium. If the employee's rights go from forfeitable to nonforfeitable, the percentage is pro-rated so the fair market value of the policy is includable in the employee's gross income. Premiums paid after the employee's rights become nonforfeitable are deductible to the employer when the premiums are paid.137
A split dollar plan is an arrangement between an employer and employee whereby policy benefits are split and the costs/premiums may be split also. They can also be set up between corporations and shareholders, or between parents and their children (private split dollar plan). Usually, the employer pays a part of the annual premium equal to the current year's increase in the cash surrender value of the policy and the employee pays the balance of the premium (if any). From this simple concept, there have arisen various "hybrid" plans, such as "employer pays all" whereby the employer pays the entire premium; and level contribution plans where the employee pays a level amount each year. If the employee dies while the plan is in effect, the employer receives an amount from the proceeds that is equal to the cash value of the policy or, in some cases, the amount of premium that has been paid into the policy —the employee's beneficiary receives the remainder.
Under recent legislation (Sarbanes-Oxley Act of 2002 Public Law 107-204) a question has arisen as to whether it is legal for a publicly traded company to set up a split dollar plan or continue paying premiums on an existing plan. Therefore, many publicly traded companies have ceased making premium payments on split dollar plans, with many of them paying bonuses to employees covered by the split dollar plans so that the employee can pay the premiums.
There are basically two plans: the endorsement plan where the employer owned the policy and the benefit-split is provided by endorsement; or a collateral assignment plan whereby the employee owns the policy and the employer's interest is secured by collateral assignment of the policy.
Newer (2003) treasury regulations define a split dollar life insurance arrangement as any arrangement between an owner and a non-owner of a life insurance contract (a) where either party to the plan pays all or a part of the premiums on the life insurance contract, including payment through a loan to the other party that is secured by the life insurance policy; (b) where at least one of the parties paying premiums is entitled to recover all or part of the premiums and the recovery is to be made from or secured by the proceeds of the life insurance policy; and (c) the arrangement is not part of a group term life insurance plan unless the plan provides permanent benefits.138
There are certain other arrangements, called "compensatory arrangements" (where the arrangement is part of a service performance agreement and not part of a life insurance plan, the employer pays all or part of the premium and either the beneficiary is designated as the employee, or the beneficiary is a person that could be expected to be so designated) or "shareholder arrangements" that are treated as split dollar arrangements, or "shareholder arrangements" (which operates similarly but the "employer" is changed to "corporation" and "shareholder" is substituted for "employee.")
For split dollar arrangements entered into after Sept. 17, 2003, tax treatment will depend upon whether the life insurance policy owner provides economic benefits to the non-owner, or the non-owner is making loans to the owner. An owner is usually the one named on the policy as the owner, and a non-owner is any other person having an interest in the policy (except for a life insurance company, of course).
A split dollar arrangement will be treated as a loan if the payment is made by the non-owner to the owner, the payment is a loan under general tax principles, and the repayment of the loan is made from or secured by either the death benefit or cash value of the policy, or both.139
If the arrangement is NOT treated as a loan, then the policy owner is treated as providing economic benefits to the non-owner (which usually occurs in an endorsement arrangement). Therefore, in order to arrive at the amount of taxes, the non-owner must take into consideration the full value of the economic benefits provided to the non-owner by the owner, reduced by any amount paid by the non-owner—such economic benefits may be compensation income, dividend, gift, or some other transfer. The "value" of the economic benefits is the cost of life insurance protection provided to the non-owner (determined by a life insurance premium factor provided by the IRS), the cash value amount to which the non-owner has access, and the value of other benefits provided by the non-owner.140
Under the economic benefit treatment, the non-owner will not receive any investment in the contract with respect to a life insurance policy subject to a split dollar arrangement. Premiums paid by the owner will be included in the owner's investment in the contract. Any amount the non-owner pays toward a policy will be included in the income of the owner and increase the owner's investment in the contract.
Death benefits paid to a beneficiary, other than the owner of the policy, because of death of the insured, will be excluded from income to the extent that the amount of the death benefit is allocable to current life insurance protection provided to the non-owner or the benefit of which the non-owner took into account for income tax purposes.141
If the policy is transferred to a non-owner, the taxation is rather complicated and the calculation should be provided by the insurer or qualified tax consultant.
If the split dollar arrangement is treated as a loan, the owner is the considered as the borrower and the non-owner is considered as the lender for tax purposes. If the split dollar loan interest is below market loan interest, then the interest will be imputed at the applicable federal rate, with the owner and non-owner considered to transfer imputed amounts to each other.142 Where the arrangement is between an employer and employee, the lender is the employer and the borrower the employee, so the employer transfers the imputed interest to the employee and this amount is taxable compensation and will generally be deductible to the employer (except in a corporation-shareholder arrangement). The employee is treated as paying the imputed interest back to the employer, which will be taxable income to the employer. The imputed interest payment by the employee will normally be considered as personal interest and therefore not deductible.
The actual calculation of the amount of imputed interest depends upon the type of below market loan involved. (Further discussion on this subject is beyond the scope of this text but can be found under Internal Revenue Code Section 7872(f), subsection 5 and 6.)
Group paid-up insurance has been popular and is a combination of accumulating “units” of single-premium whole life and decreasing units of group term life. Usually this is on a contributory plan and the employees contributions go toward units of single premium whole life insurance. The employer’s contributions provides an amount of decreasing term insurance, when added with the amount the employee pays for, equals the total amount for which the employee is eligible. Then at retirement, the term insurance portion is discontinued and the paid-up insurance remains in force on the employee for the remainder of his/her life.
Group ordinary insurancecan be any traditional plan (except group paid-up) that provides the cash value life insurance to employees, where the cost of the term portion is paid by the employer, and the cash value portion is paid by the employee (which the employee may refuse to accept). (Note discussion on permanent benefits above.)
Group Universal Lifehas the typical guaranteed interest rate, a fixed death benefit and loan option, plus the flexibility and added returns of the newer life insurance products. Group Universal Life (UL) is the same as individual UL, except that Group UL is generally issued (up to a certain amount) without evidence of insurability and is usually high enough to meet the needs of most employees. Group UL products usually pay low, or no, commission, plus administrative charges are lower than individual plans. Generally, these plans are 100% contributory; therefore the plans are totally portable. (Note discussion on permanent benefits, above.)
Retired live reserves (RLR) is a group reserve accumulated before retirement in order to pay premiums on term insurance after retirement. The employer can make tax-deductible contributions to this reserve on behalf of the employees, and these contributions are not taxed as income to the employees. RLRs can be administered through a trust or by a life insurance company and as long as there are employees participating in the plan, the reserve cannot be recaptured by the employer. If an employee dies (or resigns) prior to retirement, the individual’s reserve value is used to fund the RLR for others in the plan. The plan must be nondiscriminatory and limits the amounts to $50,000.
The includable cost of group term insurance will be included in the income of a retired employee for the year in which the coverage is received, whether or not the coverage vests upon retirement.143
There is no income to an employer for tax purposes, arising out of assigning all rights to a trust in which the employer maintained a retired lives reserve, an agreement by the trustee with the insurer that amounts credited to the reserve would be invested in a separate account of the insurer, or used to purchase annuities, and payments to the trustee under the annuity contracts to be used to provide group term life insurance for retired employees.
Interestingly, if the plan provides exclusively life insurance benefits for retired employees, the plan would be considered as a deferred compensation plan for tax purposes, so the employer's deduction would be limited to the amount includable in the employee's income, and allowed only if separate accounts are maintained for each covered employee.144
Supplemental coverages are generally available, either through the insurer of the group, or by another insurer that offers supplemental benefits, such as accidental death,or accidental death & dismemberment.
Dependent Life insurance may be offered whereby the spouse and/or unmarried dependent children are insured for usually a small amount of life insurance.
The death proceeds that are received by individuals are entirely tax exempt regardless if they are received from group permanent or group term insurance.145 Where group term life insurance is provided to the domestic partner of employees by an employer, death proceeds paid upon the death of the domestic partner are excluded from income and the same rules apply that are applicable to proceeds under individual policies. There are special rules if the insurance is payable under a qualified pension or profit-sharing plan.146
Some plans also offer Survivor Income Benefits where proceeds are payable in monthly income benefits only. Beneficiaries are not named but are covered by specified beneficiaries in the policy, and benefits usually continue as long as there is a surviving beneficiary and sometimes are discontinued if the survivor remarries.
These plans are also called a "reversionary annuity" or, simply, "life insurance," but regardless of name, "any plan that shifts the risk of loss resulting from premature death from the individual or the family to a large group contains an essential ingredient of insurance."147
There are several court cases where an individual "survivorship annuity" was deemed to be life insurance, and benefits under a self-insured state program were held to be life insurance.148
However, there have been decisions that appear to contradict the above, for instance, one self-insured state program was held not to be insurance because of the lack of actuarial soundness and because there was no death benefit if there was a surviving spouse—which makes sense, because if there is no definite benefit payable in any event upon the employee's death, there would be no risk-shifting —mandatory in insurance definition.149 Based upon this ruling, the IRS determined that a program that paid a monthly benefit only to certain survivors upon an employee's death did not exhibit the risk-shifting necessary for life insurance, so the death benefit was not eligible for tax-free treatment but was taxed as an employee death benefit.150
STUDY QUESTIONS
1. As a general rule, with group life insurance, employees
A. do not specify the benefit amount.
B. always pay the full premium.
C. must make the employer the beneficiary.
D. have the option to convert their group term insurance into an individual policy at any time
during their employment.
2. Group Term Life Insurance may be taxable to employees
A. for amount in excess of $150,000 on the life of the employee.
B. for amounts in excess of $50,000 on the life of the employee, spouse and dependants.
C. for amounts in excess of $50,000 on the life of the employee.
D. unless the basic policy is one of permanent whole life.
3. The premiums paid by an employer for group term life insurance on the lives of employees are deductible,
A. except when it discriminates in favor of key employees.
B. even if the plan discriminates in favor of key employees.
C. but for not more than 50% of the amount contributed by the employer.
D. but only on groups of more than 20 lives.
4. As a general rule, life insurance cannot be qualified as group life insurance for tax purposes unless, at some time during the calendar year
A. the employees present the employer with a petition asking for the coverage with the
signatures of at least 50% of the employees.
B. at least 5% of the full time employees either die, or convert at retirement during the year.
C. it is provided to at least 10 full-time employees who are members of the group of
employees of the employer.
D. all employees have completed a physical examination & are insurable.
5. The cost of group term insurance for over $50,000 is tax exempt
A. if the group has more than 100 employees.
B. if the group is nondiscriminatory.
C. for a former employer who has terminated his employment and has become permanently
disabled.
D. if the spouse or dependant child is named as beneficiary.
6. A group life insurance plan is discriminatory in favor of key employees unless it benefits
A. at least 70% of all employees of which 85% are not key employees.
B. none of the key employees.
C. only the beneficiaries of the key employees.
D. the employer.
7. A split-dollar plan
A. is an arrangement between an employer and employee where the only the policy benefits
are split.
B. is a form of pension plan where usually 50% of the premium goes towards mutual funds
of some other sort of savings element, the remainder purchases term life
insurance.
C. is an arrangement between an employer and employee where the policy benefits are split
and premiums may also be split.
D. is where half of the life insurance premiums purchase annuity
8. For split dollar plans, tax treatment will depend upon whether the policy owner provides economic benefits to the non-owner or
A. the total premiums for the plan are less than $5,000 per year per participant.
B. the employer is either the policy owner or the non-policy owner.
C. whether the plan is underwritten by a stock or mutual insurance company.
D. the non-owner making loans to the owner.
9. A group paid-up insurance plan
A. is a combination of accumulating units of single premium whole life and decreasing units
of group term insurance.
B. is a non-contributory group term life plan where the employees pays no premiums.
C. is actually an annuity with the annuitant being the employer and the owner, the employee.
D. consists of decreasing amounts of whole life insurance and increasing amounts of term
life insurance.
10. If a retired lives reserve plan provides only life insurance benefits to retired employees,
A. the plan would be considered as a deferred compensation plan and taxed accordingly.
B. the employer can make tax-deductible contributions to the plan and the contributions are
not taxed as income to the employees.
C. the employer can make tax-deductible contributions to the plan and the contributions are
taxed to the employee.
D. contributions to the plan are taxed to both the employer and the employee.
ANSWERS TO STUDY QUESTIONS
1A 2C 3B 4C 5C 6A 7C 8D 9A 10A