Sec.2 - Ch.9: Group Life & Disability Insurance

Question 1

What are the 4 conditions a Group Life Insurance policy must meet?

Answer 1

• It must provide a general death benefit which is excludable from gross income
• It must be provided to a group of employees as compensation for personal services performed as an employee
• The insurance must be provided under a policy carried directly or indirectly by the employer
• The amount of insurance provided to each employee must be computed under a formula that precludes individual selection of death benefits

Question 2

How are premiums taxed in a permanent group life policy, when the employee names the beneficiary? What if the employer names themselves as beneficiaries?

Answer 2

• Employee will be taxed (W-2 income) on the premiums paid by the employer
• The premiums are then deductible by the employer
• If the ER names themselves as beneficiary than the premiums can not be deducted

Question 3

What is the maximum amount of group term coverage you can get on a spouse or dependent, tax-free?

Answer 3

$2,000
- anything above and the employee pays tax on the premium

Question 4

Is the first $50k of group insurance still excluded to Key Employees in a discriminatory plan?

Answer 4

No, each key employee must include the greater of the actual cost of insurance or the cost determined from table 1 (annual basis)

Question 5

Can employers deduct the premiums on a group life insurance policy if the employee has a forfeitable right to the policy?

Answer 5

No, the employer cannot deduct the premiums

Question 6

Is a group life insurance policy included in the employees estate? What if they gives up all rights and no longer retain any incident of ownership?

Answer 6

• Yes, if they are given the ability to name the beneficiary
• After 3 years, the death benefits will be excluded from their estate

Question 7

When an employees group life insurance coverage ceases, what can they do?

Answer 7

They can convert it
- Does not require proof of insurability
- Can only be made into any type of permanent plan
- The premium will reflect the insured’s age at the conversion

Question 8

What is a carve out plan in terms of group life insurance?

Answer 8

When an employer removes one or more highly compensated employees from the life insurance coverage provided by a group term life insurance policy
- Those carved out employees are provided coverage through an individual policy

Question 9

What are the benefits of a carve out plan? How are they structured?

Answer 9

• Individual policies have lower rates and lower minimum premiums on permanent policies. They are also very portable
• The purchase and ownership and be structured as:
  - Split Dollar
  - IRC Section 162 Bonus plan
  - Death Benefit Only arrangement

Question 10

What is a Section 162 Bonus Plan?

Answer 10

When an employee purchases and owns the life insurance policy on their life, and the employer pays the premiums
- Premiums are fully deductible to the employer as compensation to the employee
- The premiums are considered a “bonus” and thus taxable income on the W-2
- A second bonus is given to cover the tax the employe has to pay on the premium

Question 11

What are the advantages of a group disability policy? Disadvantages?

Answer 11

• They are less expensive than individual policies and they require simpler underwriting
• But they can carry duel definitions of disability and other restrictive provisions. Long term typically has a benefit cap of 50% of compensation, or dollar maximum of $5kW

Question 12

What are the income tax implications for a group disability policy?

Answer 12

• Employer pays 100% of the premium so they get to deduct that premium
• Disability benefits received by the employee are considered taxable income
• Under a partially contributory plan, a portion of the premium is paid by the employee, so not 100% of the benefit is taxable income

Question 13

Which would be more beneficial: obtaining a group disability policy first or a individual policy first? Why?

Answer 13

You want to obtain the individual policy first so that you can obtain more coverage. Since the individual policy will already be in place the carriers can’t reduce the benefit based on other policies (which they would do if you had the group policy first)

Question 14

How does Social Security disability benefits affect group disability benefits?

Answer 14

SS Disability benefits generally reduce group disability insurance benefits

Question 15

What do you need to qualify for SS Disability benefits?

Answer 15

• Your mental or physical impairment must have lasted or be expected to last at least 12 months or result in death
• The benefits are subject to a 5 month waiting period and will be payable at the beginning of the 6th month