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10 - 1 Group Insurance  Characteristics  Provides insurance for a group  Typically 10 or more employees  Under master contract between the insurer.

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Presentation on theme: "10 - 1 Group Insurance  Characteristics  Provides insurance for a group  Typically 10 or more employees  Under master contract between the insurer."— Presentation transcript:

1 10 - 1 Group Insurance  Characteristics  Provides insurance for a group  Typically 10 or more employees  Under master contract between the insurer and employer  Yearly renewable form of coverage  Renewed without evidence of insurability  When use of this tool is indicated?  When an employer to provide an employee benefit they will appreciate and even expect  When insurance is difficult to obtain at standard rates  When an employer wants to offer a cost effective means of providing up to $50,000 of coverage for shareholder-employees Chapter 10 Tools & Techniques of Life Insurance Planning

2 10 - 2 Group Insurance  Advantages  Helps satisfy employer’s moral obligation  Contributes to employees morale and productivity  Provides a before-tax benefit to employees that they otherwise would have to pay with after-tax dollars  Is part of a benefit package that employees expect  Cost less for the employee than an individual policy  Provides insurance for those who otherwise might be uninsurable or unable to get insurance at standard rates Chapter 10 Tools & Techniques of Life Insurance Planning

3 10 - 3 Group Insurance  Advantages  Allows terminated employees to convert to individual policies without evidence of insurance(if conversion option is part of master contract)  Allows base upon which an employee can build a personal financial program  Employer premiums are income tax deductible  Disadvantages  Group term insurance is temporary in nature  Table I costs increases significantly as the insured get older Chapter 10 Tools & Techniques of Life Insurance Planning

4 10 - 4 Group Insurance  Disadvantages  Subject to ERISA reporting requirements  Must be provided for all eligible employees  Increases cost for employers  Employer’s out if pocket costs can increase if no new employees enter the plan  Insured population get older on average  Group plans cannot cover shareholders who are not employees  Employers cannot pick who to insure, the amount of coverage or terms and conditions of coverage  Plan must meet requirements of IRC section 79 Chapter 10 Tools & Techniques of Life Insurance Planning

5 10 - 5 Group Insurance  Disadvantages  Employees have no guarantee the group coverage will be continued  When an employee is terminated, the coverage is lost.  Although a conversion policy is available, it is usually quite expensive  By formula and design, group coverage ceases at retirement or reduces significantly  Employees may be lulled into complacency thinking the coverage is all they need  Tax implications  The employee must report and pay income tax on the economic benefit of coverage in excess of $50,000 Chapter 10 Tools & Techniques of Life Insurance Planning

6 10 - 6 Group Insurance  Tax implications (cont'd)  Computing the economic benefit Step 1 – Calculate the amount of total group coverage Step 2 – Subtract $50,000 Step 3 – Divide result by 1,000 Step 4 – Multiply result by Table I Rate to arrive at monthly taxable income Step 5 – Sum the 12 months of taxable income (taxable income for the year) Step 6 – Reduce taxable income by any employee contributions towards coverage Chapter 10 Tools & Techniques of Life Insurance Planning

7 10 - 7 Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning

8 10 - 8 Group Insurance  Tax implications (cont'd)  Under 10 lives Group Term Life Plans  Coverage must be provided for all full time employees  Amount of coverage must be computed:  As a uniform percentage of compensation  On the basis of coverage brackets as established by the employer  No bracket may exceed 2 1/2 times the next lower bracket  The lowest bracket must be at least 10% of the highest bracket  A separate schedule of coverage may be established for those over age 65  Evidence of insurability, if required, is limited to a modified questionnaire  Plan must not discriminate in favor of key employees Chapter 10 Tools & Techniques of Life Insurance Planning

9 10 - 9 Group Insurance  Tax implications (cont'd)  Eligibility Nondiscrimination Rules  Plan benefits 70% or more of all employer’s employees  At least 85% of the plan participants are not key employees  Employer specified classification must be nondiscriminatory (as determined by the IRS)  If the plan is found to be discriminatory the income tax exclusion for the first $50,000 is lost  Definition of key employee  An officer whose compensation exceeds certain limitations or  Employee owing ½% interest and one of 10 largest interests or  More than 5% owner or  More than 1% owner and compensation greater ten $150,000 Chapter 10 Tools & Techniques of Life Insurance Planning

10 10 - 10 Group Insurance  Tax implications (cont'd)  Amounts reportable income are subject to FICA and FUTA  Beneficiary receives proceeds income tax free  Premiums are income tax deductible by the employer as an ordinary and necessary business expense  Premiums for partners and or sole proprietors are not deductible  Proceeds are includible in the insured’s estate if:  They are payable to the estate  The insured held any “incidents of ownership” in the policy  Group term proceeds may be exempt of certain requirement are met Chapter 10 Tools & Techniques of Life Insurance Planning

11 10 - 11 Group Insurance  Tax implications (cont'd)  If the insured makes an absolute assignment of their rights a gift is made.  Subsequent premiums made by the employer is also considered gifts  Requirement (cont'd)  ERISA  Plan must be established and maintained in writing  Plan must provide for one or more fiduciaries who administer the plan  Plan document must provide a procedure for amending the plan  Plan must provide a claims review procedure Chapter 10 Tools & Techniques of Life Insurance Planning

12 10 - 12 Group Insurance  Requirements (cont'd)  IRC Section 79 Requirements  Plan must provide a death benefit that meets the definition of life insurance  The plan’s benefits must be provided to a group of employees as compensation for services  Policy carried directly or indirectly by the employer  The amount of insurance for employees must be computed under a formula that precludes individual selection Chapter 10 Tools & Techniques of Life Insurance Planning


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