A business owner wants to provide life insurance coverage for their key employees. The plan offers a death benefit to the employee's beneficiaries if the employee dies while employed. The premiums paid by the employer are tax-deductible, and the death benefits are received tax-free by the beneficiaries. Which type of plan is being described?
- AGroup Term Life Insurance
- BDeferred Compensation Plan
- CSplit-Dollar Life Insurance
- DKey Person Life Insurance
Show answer & explanationAnswer & explanation
Correct answer: A. Group Term Life Insurance
Group Term Life Insurance is often provided by employers, with premiums generally tax-deductible for the employer (up to $50,000 of coverage per employee, premiums for coverage above $50,000 are taxable to the employee as imputed income). The death benefits are typically received tax-free by the beneficiaries. This aligns with the scenario described.
Why the other options are wrong
- B. Deferred Compensation plans are retirement plans, not primarily life insurance with tax-deductible premiums for the employer and tax-free death benefits for beneficiaries in the same manner.
- C. Split-Dollar Life Insurance is an arrangement where employer and employee share premium and/or death benefit, with specific tax implications that don't fully match the description.
- D. Key Person Life Insurance premiums are generally not tax-deductible for the employer, though death benefits are usually tax-free to the employer.
Group Term Life Insurance Taxation
For group term life insurance, employer-paid premiums are generally tax-deductible to the employer. Up to $50,000 of coverage is tax-free to the employee; premiums for coverage above $50,000 are imputed as taxable income to the employee. Death benefits are typically received tax-free by beneficiaries.
- Employer premiums are tax-deductible.
- First $50,000 of coverage is tax-free to the employee.
- Coverage above $50,000 results in imputed income to the employee.
- Death benefits are generally income tax-free to beneficiaries.
- Coverage typically terminates upon employment.
Memory trick: Business life insurance has different tax rules depending on who owns, pays, and benefits.