7.2 Taxation of Group Life Insurance
Premiums Paid by the Employer and the Employee
Premiums paid by an employer for group term life insurance are generally tax deductible to the business as an ordinary and necessary business expense. Premiums paid by employees, however, are not tax deductible.
Employer-paid premiums for group life insurance are not considered taxable income to the employee, provided the amount of coverage does not exceed $50,000. If the employer provides coverage above $50,000, the cost of the employer-paid premiums for the amount exceeding this limit is treated as taxable income to the employee and must be reported accordingly.
Death Benefit Proceeds
Death benefit proceeds paid to a named beneficiary under a group life insurance policy are generally received income tax free.
Quiz
1. How are employer-paid premiums for group term life insurance generally treated for tax purposes by the business?
A. Not deductible
B. Deductible as an ordinary and necessary business expense
C. Deductible only if coverage exceeds $50,000
D. Taxed as capital expenses
Correct Answer: B
Rationale: Premiums paid by an employer for group term life insurance are typically considered an ordinary and necessary business expense, making them tax deductible to the business.
2. How are premiums paid by employees for group life insurance treated for income tax purposes?
A. Fully tax deductible
B. Partially tax deductible
C. Not tax deductible
D. Deductible only if coverage exceeds $50,000
Correct Answer: C
Rationale: Premiums paid directly by employees are treated as personal expenses and therefore are not tax deductible for income tax purposes.
3. Employer-paid premiums for group life insurance are not taxable to the employee up to what amount of coverage?
A. $25,000
B. $50,000
C. $75,000
D. $100,000
Correct Answer: B
Rationale: Under current tax rules, employer-provided group term life insurance coverage up to $50,000 is not considered taxable income to the employee. The value of coverage exceeding this amount is treated as taxable income.
4. What happens when an employer provides group life insurance coverage that exceeds $50,000?
A. The entire premium becomes taxable income
B. Only the portion above $50,000 is taxable income to the employee
C. The employer loses the tax deduction
D. The employee must pay capital gains tax
Correct Answer: B
Rationale: If employer-provided coverage exceeds $50,000, the cost of the premiums associated with the excess coverage must be reported as taxable income to the employee, while the first $50,000 remains tax free.
5. How are death benefit proceeds from a group life insurance policy generally taxed when paid to a beneficiary?
A. Fully taxable as income
B. Taxed as capital gains
C. Tax free
D. Taxable only if paid in installments
Correct Answer: C
Rationale: Life insurance death benefit proceeds are generally received income tax free by the named beneficiary, whether the policy is individual or group life insurance, when paid as a lump sum.