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Is Group Life Insurance Taxable?
Is group life insurance taxable? In many cases, no – but there’s a coverage threshold you have to watch out for. We’ll explain what that is, why group and individual policies differ, and the big mistake we see many clients making when it comes to group life insurance.
NOTE: As with any tax situation, we recommend consulting an accountant or CPA for guidance.
Is Group Life Insurance Taxable?
The answer to that question depends on several things:
- how much coverage you have through your employer,
- who pays for your coverage, and
- who is insured
We’ll go over each component below.
Group Life Insurance: Coverage Amount
In terms of coverage amount, the IRS tax code section 79 states that your first $50,000 of group term life insurance coverage is tax-free. As long as your employer pays the premium for that policy directly or indirectly, neither you nor your beneficiaries have any tax obligations on the first $50,000.
If, however, you have coverage that adds up to more than $50,000, the amount over $50k is counted as a “taxable fringe benefit.” You may also see it referred to as “imputed income.” That means your employer will need to report this to the IRS and that amount will be subject to tax as stated in the IRS’s Premium Table in Publication 15-B.
That tax will be charged at a rate of pennies or dollars per $1,000 of coverage in excess of $50,000 – your exact rate will depend on your age. In most cases, this tax amounts to very little.
It’s your employer’s responsibility to include this in your W2 form, so they can walk you through it if you want to see how they’ve set it up. If you’re looking at your W2, that amount will be listed in the box labeled 12c.
Summary: Is group life insurance taxable? No, as long as it’s under $50,000.
Group Life Insurance: Premium Payments
If your employer pays all of the premium payments for you, the IRS considers that they “carry” the policy. Or if your employer uses a system where they pay some of the premium and subsidize or redistribute the remaining cost of the policy among covered employees, the IRS also considers that they “carry” the policy.
If this is the case, the $50,000 rule mentioned above holds true.
However, if you bought your policy through work but pay the full premium amount yourself with zero contribution from the employer, your employer does not “carry” the policy. If that’s the case, no part of the policy is taxable for you. The IRS views that policy that same way it would view a policy you bought on the open market, from a broker like us. In which case, you do not pay tax on it.
Summary: Is group life insurance taxable? If your employer “carries” the policy, it’s only taxable after $50,000. If they don’t carry it, it’s not taxable at all.
Group Life Insurance: The Insured
The rules also differ depending on who’s insured. If you, the employee, are the only one covered, you can skip this section.
If your employer offers coverage for your spouse or kids, there’s another coverage threshold to look at. If the coverage total is $2,000 or less, it is not taxable in any way. If the coverage exceeds $2,000, the IRS may also view that policy as a fringe benefit that is taxable. Check with your employer and your tax professional to be sure.
Summary: Is group life insurance taxable if you’re not the one insured? Only if coverage exceeds $2,000.
Group Life Insurance vs. Individual Life Insurance
But how do you even know if you have a group policy? What’s the difference between group life insurance and a regular policy?
Individual policies cover a single person, while group life insurance covers a group of people, typically people who work for the same employer. If you didn’t get your coverage through work, you have an individual policy. For example, if you bought it from a local agent or an online broker (that’s us!), you have an individual life policy.
Individual policies are priced based on personal details including your age, your health, your lifestyle, and your family history. They can be designed to provide a specific amount of coverage for a certain period of time, or to provide lifelong coverage. Coverage comes in a wide range of amounts, from a few thousand dollars to multi-million dollar polices. And although you got to this page by asking, “Is group life insurance taxable?”, we can tell you that individual policies are virtually never taxable.
Group life insurance policies, on the other hand, provide a small, set amount of coverage for all members of the group. That group might be all the employees of a particular company or workers’ union. The terms of the policy are usually determined by the employer. For example, your employer may choose a standard coverage amount - $25,000 or $50,000 – to offer to anyone who works for the company.
Summary: If you got it through work, it’s a group policy; if you bought it from an agent or online, it’s an individual policy.
Can You Have Both Types of Coverage at the Same Time?
Yes – and you probably should.
The #1 mistake we see many clients making is thinking their coverage through work is enough. It almost never is.
Since group life coverage is provided by your employer, that employer isn’t taking your family’s unique needs into consideration. The coverage they offer isn’t enough to meet most people’s financial obligations, including the mortgage, credit card bills, future college tuition, lost wages, and more. In this case, you might want to supplement group coverage with an individual policy to make sure you have enough coverage.
Also, since group life insurance coverage is tied to your job, it may not be portable if you leave that job. An individual policy belongs to you no matter where you work – including if you change jobs, work in the gig economy, are a freelancer, or have seasonal income.
That’s why we recommend that, even if you have a group life term policy through work, you look into buying your own coverage as well.
Summary: The #1 mistake we see clients make is thinking their group policies offer enough coverage; supplement these small policies with a bigger, better individual policy for complete coverage.
How Do I Know if I Have Enough Life Insurance?
Determining how much life insurance you need can be a complex process. It depends on your specific circumstances and financial goals. To start, think about the following factors:?
- Your current income and expenses
- Your debts and outstanding liabilities, such as a mortgage or car loan
- Your family's future financial needs, such as your children's education expenses
- The potential costs of end-of-life expenses, such as funeral and burial costs
Once you have a good idea of your financial situation and goals, you can use our life insurance calculator or speak with one of our agents to fine-tune your estimate.
And don’t forget – your life insurance needs can change over time. It’s a good idea to review your coverage yearly to make sure it still meets your needs. If you have a new baby or a new house, for example, you may need more coverage than you currently have.
Summary: Use a life insurance calculator and then talk to one of our amazing agents to figure out how much life insurance you need – and if work can’t provide enough, we’ll help you buy your own.
