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Group term life insurance taxability

When life insurance is provided by your employer as part of your compensation plan, your employer may pay your premium but you may owe taxes on those payments for coverage over $50,000. This means that if your policy covers $50,000 or less, you will not pay federal tax on it. However, if your policy covers more than $50,000, then you will pay federal tax as imputed income only on the cost of coverage that is more than $50,000.

The cost of group term life insurance that exceeds $50,000 is based on federal premium tables, which provide the cost of each $1,000 of excess coverage per month that should be included in federal taxable income of the employee. The cost of coverage is based on the employee’s age, the amount of coverage over $50,000, and the amount of coverage the employer pays for. The IRS premium tables are published in federal regulations, and can also be found in the IRS Employer’s Guide to Fringe Benefits.  A copy of the federal premium tables as of 2017 is included below:

Cost Per $1,000 of Protection for 1 Month

Age

Cost

Under 25

$0.05

25 through 29

0.06

30 through 34

0.08

35 through 39

0.09

40 through 44

0.10

45 through 49

0.15

50 through 54

0.23

55 through 59

0.43

60 through 64

0.66

65 through 69

1.27

70 and older

2.06

Source: IRS Employer’s Guide to Fringe Benefits (2017)

Example calculation

John’s life insurance policy covers $200,000, he is 45 years old, and the premium is fully paid by his employer. John does not need to pay federal taxes on the first $50,000 worth of coverage, but he will pay federal tax on the excess $150,000 of coverage. The total cost to include in John’s federal taxable wages would be $270 per year (0.15 x 150 x 12).

Note: If an employee is contributing to a life insurance policy, contributions will default to post-tax deductions unless otherwise specified. Learn more from the IRS.