Any coverage in excess of $50,000 is taxable to the employee, and the taxable amount is based upon an IRS formula.
Your spouse and dependents may also be covered by the group life insurance policy. Up to $2,000 of coverage is tax-free. An IRS formula is used to determine the amount of taxable income you will treated as earning for any coverage in excess of the $2,000 amount.
When the life insurance proceeds are eventually paid due to the death of the insurance, the life insurance proceeds are not subject to taxation. This is even true if the benefits are received before death if the insured is terminally or chronically ill.
Your employer may even take a tax deduction for a portion of the premiums paid as long as the plan does not discriminate between employees and your employer is not a beneficiary under the life insurance contract.
All this sounds great, right?
There are significant limitations for self-employed individuals (which general includes sole proprietors, partners, members of an LLC, and more than 2% S-corporation shareholders). As a self-employed individual, you are not treated as an employee for these purposes, and therefore you are not allowed to take a business deduction for the life insurance premiums relating to coverage on you or your family.
Also, if the employer owns the life-insurance contract, the business must include the death benefit proceeds paid (to the extent they exceed the premiums paid) in its gross income. There are 3 exceptions to this:
- The insured individual was an employee within 12 months before death;
- The proceeds are paid to buy back an equity interest; or
- The insured was a highly compensated employee at the time the contract was issued.
If you would like a referral to talk to someone licensed to sell life insurance policies, I would be happy to do that as well.
As always, please do not hesitate to leave your feedback in the comments section below.
