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Group Insurance

Group Insurance. Chapter 10 Tools & Techniques of Life Insurance Planning. 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

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Group Insurance

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  1. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

  2. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

  3. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

  4. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

  5. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

  6. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

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

  8. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

  9. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

  10. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

  11. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

  12. Group Insurance Chapter 10 Tools & Techniques of Life Insurance Planning • 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

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