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One of the bread-and-butter staples of a well-conceived employee benefit program is the classic group term life insurance.  You join a company, fill out a beneficiary form, and voila, you are provided with group term life insurance equivalent to a multiple of salary, such as two times annual earnings.  You don’t think much of this benefit until you receive your W-2 form at the end of the year.  Imagine your surprise when you look at Box 12, Code C, and find a taxable cost in the thousands!

Group term life insurance is taxed under IRC Section 79.  An employee is allowed to exclude any cost for the first $50,000 of coverage provided.  Amounts of insurance over $50,000 are considered income to the employee, and taxed using the Uniform Premium Table (Table I) in IRC Section 79.  The dollar amount added to the employee’s taxable income is calculated based on the employee’s age and amount of coverage.  Since Table I uses outdated and artificially inflated rates, the cost to the employee can be significant.

Many of our clients are surprised and exasperated by the high tax cost they are forced to report, and come to us seeking solutions.

For those individuals who do not need the insurance, naming a charitable organization as a beneficiary of the group term policy is a terrific solution to avoid the Table I tax.  And if the employee actually needs the life insurance coverage and is healthy, the employee can go out and purchase an individually owned and controlled term life insurance policy that will actually cost the employee less than the aforementioned group term.  We call this concept the two-fer: benefitting two beneficiaries (charity and personal) for one cost.  Think about this again.  For less than the cost you were previously paying for your group term life, you have benefitted a charity and improved your personal life insurance portfolio via a portable policy with level premiums and no automatic age reductions.

As an example, let’s review the economics of a male, age 58 who has $800,000 of group term life.  The initial $50,000 of coverage is a freebie to the employee.  From ages 58 to 67, the employee will report taxable income on $750,000 of coverage totaling $71,730!  At a 40% tax bracket, this “free” benefit has actually cost the employee close to $29,000!  Alternatively, if the employee designates a charity as beneficiary of the group term amount, the employee avoids this astronomical tax cost. Simultaneously, the employee can go out and replace the $750,000 of coverage at a cost of only $1,567 per year, or $15,670 over 10 years.

You owe it to yourself and your beneficiaries to investigate the better solutions to this costly, “free” benefit. Most people don’t like paying taxes. Paying taxes needlessly is worse.

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