Employer-Provided Group Term Life Insurance (Part 1)

Does your employer provide you with group term life insurance? If so, and if your salary is higher than $50,000, this employee “benefit” may be creating undesirable income tax consequences for you. Here’s why.

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you even though you never actually receive it (i.e., it is “phantom income”). What’s worse, the cost of group term insurance must be determined under a table prepared by IRS even if the employer’s actual cost is less than the cost figured under the table. Under this table, the amount of taxable phantom income attributed to an older employee will often be higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as the employee gets older and as the amount of his compensation increases.

In our next blog post, we will discuss what to do if you think you fall into the category of someone whom the tax cost of
employer-provided group term life insurance is undesirably high.

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