241 / What is group term life insurance?

For group term life insurance to qualify for special tax exclusion by employees, the life insurance must meet the following four conditions:

General Death Benefit

First, it must provide a general death benefit that is excludable from gross income under IRC Section 101(a). Under the regulations, travel insurance and accident and health insurance including amounts payable under a double indemnity clause rider do not provide a general death benefit.¹ Employer contributions for these benefits are contributions to a health plan under IRC Section 106 instead of Section 79 ( Q 8789).

Group of Employees

Second, it must be provided to a group of employees as compensation for personal services performed as employees. A group of employees are all of the employees of an employer, or fewer than all if membership in the group is determined solely on the basis of age, marital status, or factors related to employment including membership in a union, duties performed, compensation received, and length of service. See Q 242 for a detailed discussion of the group requirement.

Employer Provided Policy

Third, the insurance must be provided under a policy carried directly or indirectly by an employer. A policy meets this requirement if an employer pays any part of the cost, directly or through another person, or arranges for payment by employees and charges at least one employee less than his or her Table I cost and at least one other employee more than his or her Table I cost. The policy can be a master policy or a group of individual policies.

Regulations define the term policy as including all obligations of an insurer that are offered or that are available to a group of employees because of the employment relationship, even if they are in separate documents.² An employer may elect to treat obligations not providing permanent benefits as separate policies if the premiums are properly allocated. An employer also may elect to treat an obligation providing permanent insurance as a separate policy if:

(1)     the employee buys the policy directly from the insurer and pays the full cost;

(2)     the employer’s part in the sale is limited to selection of the insurer, the type of coverage, and certain sales assistance, such as providing employee lists to the insurer, permitting use of the employer’s premises for solicitation, and collecting premiums through payroll deduction;

(3)     the obligation is sold on the same terms and in substantial amounts to individuals who do not purchase, and whose employers do not purchase, any other obligations from the insurer; and

(4)     no employer-provided benefit is conditioned on purchase of the obligation.³

Computed under a Formula

Fourth, the amount of insurance provided each employee must be computed under a formula that precludes individual selection of such amounts. The formula must be based on factors such as age, years of service, compensation, or position. This requirement may be satisfied even if the amount of insurance provided is determined under alternate schedules based on the amount each employee elects to contribute. The amount of insurance under each schedule must be computed under a formula that precludes individual selection.

Where one factor, percentage of compensation, of a two factor formula covered all employees but one, and the other factor, position, applied to only one position held by only one individual, the president, the Tax Court held that the formula did not preclude individual selection of jumbo coverage for the president.⁴

On the other hand, a formula based on positions that included several individuals in each category was held to preclude individual selection.⁵

Where the amount of an employee’s insurance protection under a group program is reduced by the amount of the employee’s death benefit under the employer’s pension plan, the group protection is not group term life insurance because the formula for determining the amount is based on a factor other than, and not comparable to, age, years of service, compensation, or position.⁶

A provision in a group term life insurance plan that offered employees the option to reduce their coverage by certain amounts, but not below $50,000, was found not to preclude individual selection of the insurance amounts.⁷

Instead of a lump sum settlement of death benefits, an employer may select payment of equal installments over a fixed period of time without affecting the plan’s status as group term life insurance.⁸

Federal group term life insurance covering federal civilian employees qualifies as group term life insurance.⁹

Term life insurance to be provided after retirement that is offered by certain educational institutions under a cafeteria plan is treated as group term life insurance ( Q 3501).¹⁰

If employer-provided term life insurance does not qualify as group term insurance, the premium paid by the employer is includable in the employee’s income.¹¹

If an insurer providing group term life insurance also makes available a permanent benefit to members of the group because of the employment relationship, see Q 254.