Life & Health Insurance Exam (National Portion)Taxes, Retirement, and Other Insurance ConceptsMedium
An employer provides a group life insurance policy to its employees, with each employee receiving $50,000 of coverage. For employees earning more than $50,000 annually, the employer pays the full premium. What are the tax implications for an employee receiving $75,000 in group life insurance coverage, for which the employer pays the entire premium?
- AThe employer's payment for the entire $75,000 of coverage is fully taxable as income to the employee.
- BThe employee can deduct the premium paid by the employer for the first $50,000 of coverage.
- CThe premium for the first $50,000 of coverage is tax-free, but the premium for the additional $25,000 is taxable income to the employee.
- DThe entire $75,000 of coverage is considered a tax-free benefit to the employee.
Show answer & explanationAnswer & explanation
Correct answer: C. The premium for the first $50,000 of coverage is tax-free, but the premium for the additional $25,000 is taxable income to the employee.
Employer-provided group term life insurance coverage up to $50,000 is a tax-free benefit to the employee. Any coverage exceeding $50,000, for which the employer pays the premium, is considered taxable income to the employee, calculated using IRS premium tables.
Why the other options are wrong
- A. Incorrect; the first $50,000 of coverage is a tax-free benefit.
- B. Incorrect; employees do not deduct premiums paid by the employer for group life insurance.
- D. Incorrect; only the first $50,000 of coverage is tax-free.
Taxation of Employer-Provided Group Life Insurance
The cost of employer-provided group term life insurance coverage up to $50,000 is tax-free to the employee. The cost of coverage exceeding $50,000 is considered taxable income to the employee, calculated using IRS Table I rates.
- First $50,000 of coverage is tax-free to the employee.
- Coverage above $50,000 is taxable to the employee.
- Taxable amount is calculated using IRS Table I uniform premium rates.
- Employer can deduct the premiums paid.
Memory trick: Group life has a '50K' sweet spot; 'MORE' means 'TAX' for the employee.