What? Employer-offered Life Insurance Needs to be Reported as Taxable Income?
You may have group life insurance through work and your employer pays the premiums. Isn’t that considered free insurance? What is this Section 79 of the Internal Revenue Code that you may need to be worried about?
For example: Your salary is $60K a year, and your employer gives you 3 times your salary in life insurance coverage, as an employee benefit. Section 79 states that any coverage over $50K is subject to taxation based on age and what the cost per $1,000 of coverage is (monthly), whether or not you are paying any of the premium towards that coverage?
This means that if you have a $180K face amount of coverage, then initially you may have a potential taxation on $130K of coverage. Section 79 states on Uniform Premium Table I that someone between ages 25-29 has a cost per $1,000 of only $0.06, and someone between 40 and 44, only $0.10, just as examples. But you are between ages 60-64 and look how much more it is at $0.66! Therefore, $0.66/$1,000 X $130,000 (130) = $85.80/month. Multiply the monthly amount times twelve months and you should potentially be claiming $1,029.60 as income on your annual taxes. Unfortunately, you are not paying anything toward the premium, so you can’t subtract any premium payments from the $1,029.60 that you would have to claim.
Hopefully, if your beneficiary receives the proceeds of the life insurance on your passing as a lump sum, there would be no tax ramifications. If however, it is received in installments over a period of more than one taxable year, then the interest earnings attributed to the proceeds would be includable in your beneficiary’s income for taxation purposes.
I am hoping this information will be helpful to you and that hopefully, your accountant is aware of this IRS code. But did you know that if you had your own individual life insurance policy you wouldn’t have to worry about Section 79 of the Internal Revenue Code?
About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at 1-800-651-1953 or KMcDonald@Pivot.com.