Are life insurance premiums paid by my employer taxable?
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UPDATED: Jan 9, 2017
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- The answer is that it depends on how much life insurance your employer is paying for.
- Employer-paid life insurance premiums covering the first $50,000 in insurance are not taxable to you. But premiums your employer pays for any face amount of insurance over $50,000 are treated by the Internal Revenue Service as income paid to you, and you will have to pay income tax on this amount.
- Any employer-paid premiums for group life insurance, whereby someone other than the employer is the beneficiary (in other words, the policy is an “employee benefit”), are considered business expenses and result in a tax benefit to the employer.
- But if the employer is the beneficiary of the life insurance policy, the employer cannot deduct those premiums for tax purposes.
While the taxation of life insurance premiums may appear complicated, it is not the most complex part of the U.S. tax code!
There are a finite number of rules governing this area of taxation, and you can learn and know them in the time it takes to read this short article.
Learn more about life insurance premiums below and make sure to use our free comparison tool above to compare the cheapest rates.
How Employer-Paid Life Insurance Premiums Are Taxed: What Employees Need to Know
Most large American firms offer their employee’s group life insurance as a benefit of employment.
The amount of life insurance may be set at a flat amount for each employee or class of employees. In this case, the death benefit would be the same for each employee, say $10,000. Many employers choose this option.
Alternatively, the employer may offer each employee a face amount of insurance that is calculated as a percentage of the employee’s annual salary.
As the fundamental premise for life insurance is to replace a family’s income if it loses the earning power of its breadwinner, this method would also seem to make sense.
As an employee, what’s important to know is that employer-paid premiums for the first $50,000 of group life insurance do not hit your balance sheet as income.
If your group policy gives you a face amount of more than $50,000, however, the premiums paid by your employer for the additional amount would be considered by the IRS to be a taxable benefit to you.
Those premiums are considered non-cash income and are taxed at the same rate as your regular income.
If the employer plan also covers your spouse and dependents, you’ll be off the hook for taxes for premiums that cover the first $2,000 in life insurance. Beyond the first $2,000, you will likely pay tax on the amount of the additional premiums.
Employer-paid individual life insurance is more likely to be offered at smaller firms with only a few employees to cover. The employer may pay the premiums while the employee is the designated owner of the policy.
In this kind of arrangement, if the employee leaves the company they can assume payment of the premiums and retain the policy.
As far as taxation, if the employer pays the premiums, the same rule applies for both types of plans: up to the first $50,000, there is no tax burden on the employee.
If this employee later leaves and takes over the premium payments, the tax deduction would go to the employee.
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How Employer-Paid Life Insurance Premiums Are Taxed: What Employers Need to Know
Life insurance premiums paid by an employer are tax-deductible to the employer as a business expense, except when the business is itself the beneficiary of the policy.
Businesses carry many kinds of insurance and may carry several different types of life insurance. These types fall into the following categories:
- Group life insurance
- Individual life insurance
- Key Employee (Key Person) insurance
- Stock Redemption or Entity Purchase Agreement
- Split Dollar insurance
The premiums a business pays for group life insurance for its employees are tax deductible for the employer.
However, the business will pay taxes on the insurance premiums it pays for Key Employee, Stock Redemption, and Split Dollar insurance plans. These types of life insurance are not employee benefits, but a benefit to the business itself.
Key Employee insurance helps a business cover the costs associated with losing a key employee. It might be used to pay costs associated with finding that person’s replacement, and perhaps keeping the business running in crisis mode.
Stock Redemption or Entity Purchase Agreements are usually used in partnerships, so that if one partner dies the other partner has the money to buy out their share of the business.
These may also be referred to as Buy-Sell Agreements.
Split Dollar is a strategy, usually utilizing Individual insurance, whereby employer and employee share the cost of premiums for a permanent, cash-value life insurance policy.
This strategy is usually used as an executive bonus or retention tool, to broaden the benefits of a valued employee.
In none of these cases can the employer take a tax deduction for the premiums paid.
Learn About the Tax Treatment of Life Insurance
Your tax accountant will be happy to advise on all these matters. The tax treatment of your life insurance, in general, should be on the agenda for your annual or bi-annual meetings with your financial professionals.
A lot of money is left on the table because many taxpayers simply don’t know about the tax advantages available to them through life insurance.
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