260 / What is group survivor income benefit insurance?

A group term product that provides for a death benefit only if there is a survivor who qualifies for benefits under the plan (a lump sum payment of the commuted value of benefits is not available) may be called a reversionary annuity or life insurance. Regardless of the name, a plan that shifts the risk of loss resulting from premature death from an individual or family to a large group is an essential ingredient of insurance.¹

An individual survivorship annuity was characterized as life insurance in Cowles v. United States.² Benefits under a self-insured state program were held to be life insurance proceeds in Ross v. Odom.³

On the other hand, another self-insured state program was held not to be insurance because of the lack of actuarial soundness and the lack of a definite death benefit payable on death, as there was no death benefit if there was no surviving spouse. The court reasoned that absent a definite benefit payable in any event on the employee’s death, there was no risk-shifting.⁴

Following the reasoning of this case, the IRS concluded that a program that paid a monthly benefit only to certain survivors on an employee’s death did not exhibit the risk-shifting characteristic of life insurance. Thus, the death benefit was not eligible for tax-free treatment under IRC Section 101(a), and was taxed as an employee death benefit.⁵

Policies issued after December 31, 1984, generally are life insurance contracts if they meet the definition discussed in Q 65. If these products are held to be life insurance, they are taxed as group term life insurance if they meet the requirements in Q 241.

If they are annuities, the tax consequences are explained in Q 3532 to Q 3539 and Q 101.