2.10 Life Insurance Benefits

Company-financed insurance gives employees benefits at low or no tax cost.

Group life insurance.

Group insurance plans may furnish not only life insurance protection but also accident and health benefits. Premium costs are low and tax deductible to the company while tax free to you unless you have nonforfeitable rights to permanent life insurance, or, in the case of group-term life insurance, your coverage exceeds $50,000 (3.4). Even where your coverage exceeds $50,000, the tax incurred on your employer’s premium payment is generally less than what you would have to pay privately for similar insurance.

It may be possible to avoid estate tax on the group policy proceeds if you assign all of your ownership rights in the policy, including the right to convert the policy, and if the beneficiary is other than your estate. Where the policy allows assignment of the conversion right, in addition to all other rights, and state law does not bar the assignment, you are considered to have made a complete assignment of the group insurance for estate tax purposes.

The IRS has ruled that where an employee assigns a group life policy and the value of the employee’s interest in the policy cannot be ascertained, there is no taxable gift. This is so where the employer could simply have stopped making payments. However, there is a gift by the employee to the assignee to the extent of premiums paid by the employer. The gift may be a present interest qualifying for the annual gift tax exclusion (39.2).

Split-dollar insurance.

Where you want more insurance than is provided by a group plan, your company may be able to help you get additional protection through a split-dollar insurance plan. Under the basic split-dollar plan, your employer purchases permanent cash value life insurance on your life and pays all or part of the annual premium. At your death, your employer is entitled to part of the proceeds equal to the premiums he or she paid. You have the right to name a beneficiary to receive the remaining proceeds which, under most policies, are substantial compared with the employer’s share. Equity split-dollar arrangements allow employees to retain the right to the cash surrender value in excess of the premiums paid by the employer.

Caution

Charitable Split-Dollar Insurance

In a charitable split-dollar insurance plan, you give money to a charity, which invests in a life insurance policy and splits the proceeds with your beneficiaries. Taxpayers have attempted to deduct the initial “donations,” but the tax law was changed to disallow the deduction.

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In final regulations applicable to split-dollar arrangements entered into or materially modified after September 17, 2003, the IRS has provided two sets of rules, depending on whether the employee or the employer owns the insurance policy (T.D. 9092, 2003-46 IRB 1055). If the employee is the owner, the employer’s premium payments will be treated as loans and the imputed interest will be taxed to the employee. If the employer owns the policy, the employee will be taxed on the value of the life insurance protection, the policy cash value that the employee has access to, and the value of any other economic benefits received from the policy.

In addition, the Section 409A rules for nonqualified deferred compensation plans (2.7) may also apply to certain types of split-dollar arrangements. Notice 2007-34 contains IRS guidance on applying the Section 409A rules and explaining the effect of modifications to a split-dollar arrangement.