Renewal gives you a natural reason to sit down with a department and take a fresh look at its group term life insurance. You already know the rate will come up in conversation. Three other questions deserve a spot on the agenda, too, and each one can change what the department buys.
1. Do Benefit Levels Still Match the Membership Roster?
A program like the one offered by Provident allows a fire department or emergency services organization to purchase up to $100,000 in coverage per member. It also allows different benefit levels for different membership classes. A class groups members who receive the same benefit level, such as paid staff or volunteers.
Rosters change between renewals. A volunteer takes a paid position, or a recruiting push adds new members. Either change can leave people in a class that no longer fits their role.
Pull the current roster, and set it next to the class schedule. Ask the chief whether each member is in the right class and whether each class’s benefit level still aligns with what the department wants to provide. Provident offers guaranteed issue coverage to eligible class members, with no medical questions. Under the policy terms, class placement shapes who receives coverage and at what level.
Class benefit levels also lead straight into the next question. A class set above $50,000 for paid staff raises a tax issue the department should settle before renewal.
2. Will Coverage Above $50,000 Create Taxable Income for Paid Members?
The tax question applies to the coverage itself, before any death benefit is paid. Under IRS rules for group-term life insurance, Section 79 of the Internal Revenue Code excludes the first $50,000 of coverage under a policy an employer carries directly or indirectly from the employee’s income.
When employer-carried coverage exceeds $50,000, the IRS assigns a value to the additional coverage using its Premium Table. Employees must include that amount, known as the imputed cost, in their income, and Social Security and Medicare taxes apply to it.
Whether the rule applies depends in part on how the coverage is funded and structured. The IRS considers a policy employer-carried when the employer pays any part of the cost. In some arrangements, a policy also counts as employer-carried when the employer arranges premiums so that some employees’ payments subsidize others’.
Provident’s program allows up to $100,000 of coverage per member, which exceeds the threshold. If coverage for paid employees could top $50,000, encourage the client to involve payroll or a tax adviser before renewal. They can determine whether the arrangement creates imputed income and how to handle it.
Does the Dependent Option Still Fit Members’ Households?
Dependent coverage extends life insurance protection to members’ families. Provident offers three options:
- Option 1: $2,500 for a spouse and $1,000 for children
- Option 2: $5,000 for a spouse and $2,500 for children
- Option 3: $10,000 for a spouse and $5,000 for children
Dependent coverage raises a similar tax question, again tied to the coverage rather than any future benefit payment. The IRS excludes the cost of employer-paid coverage on a spouse or dependent from the employee’s income as a de minimis (minimal-value) fringe benefit when the face amount doesn’t exceed $2,000. Every spouse amount above exceeds $2,000, and so do the child amounts in Options 2 and 3.
Amounts above $2,000 can still qualify as de minimis, depending on the facts and circumstances. If part of the dependent coverage is taxable, the IRS uses the same Premium Table it applies to employee coverage. Departments with paid employees should confirm the treatment with their tax adviser before choosing an option.
Renewal is also a good time to confirm that members know how to review and update their beneficiary designations. A marriage or a new child since the last renewal is reason enough to check. Members may also ask what else the coverage includes. Provident’s program includes Accelerated Death Benefits, Continuance Provisions, and Conversion Rights, and Provident’s office can explain the terms of each.
Use Renewal Season To Revisit Group Term Life Insurance Coverage
Before the renewal meeting, gather the current roster with each member’s class. Add the total employer-carried life coverage for paid employees, including any city plan, and note the department’s current dependent option. With those in hand, the group term life insurance conversation moves past the rate. Contact Provident today to learn more.
Common Questions About Group Term Life Insurance
Is optional group term life insurance taxable if the employee pays for it?
It can be. In an IRS example, an employee has $40,000 of employer-carried coverage and buys $100,000 of optional coverage at her own expense. The IRS considers the optional coverage employer-carried as well. The cost of $10,000 of it is excludable, and the cost of the remaining $90,000 counts as income. If the optional policy weren’t considered employer-carried, none of the $100,000 would count as income.
How is imputed income on group term life insurance calculated?
Payroll applies IRS Premium Table rates to employer-carried coverage above $50,000. The table lists the cost per $1,000 of coverage by age group. The IRS calculation uses those rates rather than the department’s actual premium cost. Any amount the employee pays toward the coverage is then subtracted from the calculated cost.
About Provident
Founded in 1902, our rich history involves the creation of custom firefighter insurance benefits in 1928. Today, Provident continues to be a pioneer in developing insurance programs for firefighters, EMS providers, municipal entities, and law enforcement. In addition, we provide Special Risks insurance for various volunteer and nonprofit groups. Give us a call today at (412) 963-1200 to speak with one of our representatives.