Ah, the good old days, when employers routinely provided life insurance to their employees as a tax free fringe benefit, often a multiple of the employee’s salary. Today, not only are fewer employers even offering group term insurance, but the IRS now taxes the employee on amounts in excess of $50,000.
Years ago, it seemed that most employers provided group life, but today I’m meeting many folks who receive no life insurance benefit through their employer. So if you work for an employer that provides life insurance as a benefit, consider yourself lucky.
The benefit can be provided either as a flat amount, e.g. $25,000, or as a multiple of salary. Regardless of the method used, there is no tax to the employee as long as the total amount provided does not exceed $50,000. If the total amount provided exceeds $50,000, that amount is generally taxable (see IRS Publication 15-B).
Even if the employee is subject to tax, it is still usually a good deal, because the employee only has to pay the tax on the premium instead of paying the entire premium. The area that is not as clear cut is with supplemental group term, where the employer offers additional coverage to the employees, but the employees are responsible for the entire premium. These situations should be analyzed individually, although a general rule of thumb is it is a good deal for younger employees and not such a good deal for older (over 40) employees.
The downside to group term insurance is that the employee doesn’t own it, and hence has no control over it. The obvious situation is if the employee, voluntarily or involuntarily, leaves the employer. The group policies usually have a conversion feature, whereby the exiting employee can convert the term policy to a permanent policy, but that usually isn’t a practical option if the employee is laid off.
Another possibility, especially in a precarious economy, is that the employer can cancel the group insurance. That wouldn’t be an insurmountable problem to healthy employees, but could be devastating to an employee who is uninsurable.
So while group term is generally a good benefit for employees to have, it should always be supplemented with personally owned life insurance.