Overview

Many employers provide group term life and accidental death and dismemberment (AD&D) insurance for their employees. These income protection plans provide a payment to an employee’s beneficiaries upon the unfortunate event of an employee passing away. Benefits typically range from $50,000 flat, 1x earnings, or 2x earnings. There is usually a maximum benefit for salary-based formulas (such as $500,000). Additionally, these benefits are most often provided to all benefit-eligible employees without the need for a medical examination or health history disclosure also known as Evidence of Insurability (EOI). When Group Life insurance also includes AD&D coverage, beneficiaries receive benefit payments from both the Group Term Life plan and the AD&D plan if the death is due to an accident.

Beneficiaries

Beneficiaries are individuals, organizations and/or Trusts you list to receive the benefit payment following your passing.  If more than one person or entity is listed as a beneficiary, you can select a percentage of the benefit to be payable to different beneficiaries totaling 100%. For example, you may choose 70% goes to your spouse and 30% goes to your Trust.

When selecting your beneficiaries, most systems allow you to list primary and secondary beneficiaries. Primary beneficiaries are the first to receive the benefit payment, while secondary beneficiaries only receive a benefit payment if the primary beneficiaries have also passed away. 
 

It is not recommended to list a minor as your beneficiary, as insurance carriers are unable to make benefit payments to minors. If a minor is listed as a beneficiary, the benefit payment is significantly delayed as the courts must first appoint a guardian to receive the payment. 
 

You may change your beneficiaries at any time. It is recommended to review your beneficiaries at least once per year. Open Enrollment is a great opportunity to review and update your beneficiaries.

Age Reductions

Most policies have a provision such that benefits reduce at age 65 and further reduce at ages 70 and 75. Check your plan documents, available from the insurance carrier, for specific benefit reduction information.

Voluntary Life and AD&D

Some employers offer an option for employees to purchase additional Term Life and/or AD&D insurance that provides a benefit payment to beneficiaries in addition to the Group Term Life and AD&D plans.  There may be restrictions on when you can elect Voluntary Life and AD&D insurance for the first time, when and how much you can increase current elections, and whether or not you will be required to complete Evidence of Insurability (EOI), a short medical questionnaire, that must be reviewed and approved by the insurance carrier before the voluntary coverage is active.  If Voluntary Life and AD&D plans are offered by your employer, please review the plan documents to understand your specific plan’s provisions.
 

Taxation of Benefits

The proceeds of a group term life insurance policy—when paid to your beneficiary—are generally income tax free. Proceeds are subject to estate taxes (which apply to certain large estates).

Taxation of Premiums

The value of up to $50,000 of employer paid group term life insurance is tax exempt. However, the value of any coverage in excess of $50,000 is taxable to the employee per the IRS guidelines. This is called Table I Taxation. The following schedule is used to calculate the taxable benefit of the group term life insurance in excess of $50,000.

Premium Taxation Example

Sue Smith is 33 years old with an annual income of $75,000. Her life insurance benefit is $75,000. The following is an overview of the calculation of the taxation of her life insurance benefit: 

If Sue worked the entire 12 months, the value of her excess life insurance benefit (the amount in excess of $50,000) would be $24.00. That does NOT mean that she will pay tax of $24. Rather, it means that $24.00 would be added to her income and she would be responsible for paying regular income taxes on the $24 of additional income (as if it were additional compensation). 

Note that if Sue didn’t work for all 12 months of the year, the value of her life insurance benefit would be prorated based on the number of months she actually worked. In that case, her taxable benefit would be $2.00 x the number of months she worked.