Group Life and Disability Insurance Flashcards
1
Q
Group Life Insurance - Conditions
A
Must meet 4 conditions
- must provide a general DB which is excluded from gross income
- must be provided to group of employees as comp for services
- insurance policy must be carried directly or indirectly by employer
- amount of insurance must be computed under formula
2
Q
Group permanent life insurance (nonforfeitable)
A
- does not meet requirements to be treated as group term life insurance
- employee will be taxed on premiums paid by employer if employee names beneficiary
- employer deducts premiums
3
Q
Dependent coverage
A
- group term on spouse and dependents is excluded from 50k exemption
- cost of coverage will be tax free if face amount doesn’t exceed 2k, above 2k, employee pays tax on premium
4
Q
Group Term - Income Tax Implications
A
- employees generally not taxed on premiums paid by employers if coverage doesn’t exceed 50k
- if total exceeds 50k, the employee is taxed on the cost over 50k- amount paid
- employer can deduct premiums and must let employee know if its resulting in w-2 income (over 50K)
- the tax is also subject to FICA and FUTA if not self employed
5
Q
Group Term - Tax Calculation
A
contribution rate * coverage
=
amount included in income
6
Q
Discriminatory Group Life Plans
A
- 50k exclusion only available to key employee if the plan doesn’t discriminate
- if plan is discriminatory, key employee will include greater of, actual cost of insurance, or cost determined by table 1
- non-key employees retain 50k exclusion even in a discriminatory plan
7
Q
Group permanent life insurance
A
- the employer can deduct premiums only if the employees right to the insurance on his life is nonforfeitable
- if employee has forfeitable right to insurance, employer cant deduct premiums
8
Q
Employee benefit analysis and application
A
- group life is often flat amount or multiple of salary
- employer owns policy but employee can select beneficiaries
- the ability to name beneficiary causes DB to be included in employees estate
9
Q
Assignment of group term life
A
- employee can assign all incidents of ownership
- can complete absolute assignment: give up all rights, after 3 years DB is excluded from estate
10
Q
Incidents of ownership
A
- right to name / change beneficiary
- right to convert the policy
- right to terminate the coverage
11
Q
Conversion analysis
A
- any employee whose group life coverage ceases has the right to convert to an individual life policy
- conversion doesn’t require proof of insurability
- conversion can be made to any type of permanent policy
- the premium will reflect the insureds age at conversion
12
Q
Carve-out plans
A
- employer removes (carves out) one or more highly compensated employees from group term life coverage
- carved out employees get individual policies : portability huge benefit
- types of individual plans used: split dollar, IRC section 162 bonus plan, DBO (death benefit only)
13
Q
IRC Section 162 bonus plan
A
- employee purchases and owns the policy
- employer pays premium and deducts it
- premium is taxable income to employee
- employee pays tax on premium even though the benefit was not received in cash (phantom income)
- typically a second bonus is paid to cover the tax
14
Q
Group disability plans
A
- short term: start day 1 or 8, last 13,26,52 weeks. limited benefits paid weekly
- long term: start 30 days to 2 years, last until 65. benefits paid monthly usually salary 50-60% or dollar max
15
Q
Definition of disability
A
- short term policies give limited weekly benefits so its not unusual to have more liberal definition
- long term typically own for 2-5 years and then modified any after
