10 - 1 group insurance characteristics provides insurance for a group typically 10 or more...
TRANSCRIPT
10 - 1
Group Insurance
Characteristics Provides insurance for a group
Typically 10 or more employees Under master contract between the insurer and employer
Yearly renewable form of coverage Renewed without evidence of insurability
When use of this tool is indicated? When an employer to provide an employee benefit they will appreciate and even expect
When insurance is difficult to obtain at standard rates
When an employer wants to offer a cost effective means of providing up to $50,000 of coverage for shareholder-employees
Chapter 10Tools & Techniques of Life
Insurance Planning
10 - 2
Group Insurance
Advantages Helps satisfy employer’s moral obligation
Contributes to employees morale and productivity
Provides a before-tax benefit to employees that they otherwise would have to pay with after-tax dollars
Is part of a benefit package that employees expect
Cost less for the employee than an individual policy
Provides insurance for those who otherwise might be uninsurable or unable to get insurance at standard rates
Chapter 10Tools & Techniques of Life
Insurance Planning
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Group Insurance
Advantages Allows terminated employees to convert to individual policies without evidence of
insurance(if conversion option is part of master contract)
Allows base upon which an employee can build a personal financial program
Employer premiums are income tax deductible
Disadvantages Group term insurance is temporary in nature
Table I costs increases significantly as the insured get older
Chapter 10Tools & Techniques of Life
Insurance Planning
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Group Insurance
Disadvantages Subject to ERISA reporting requirements
Must be provided for all eligible employees Increases cost for employers
Employer’s out if pocket costs can increase if no new employees enter the plan Insured population get older on average
Group plans cannot cover shareholders who are not employees
Employers cannot pick who to insure, the amount of coverage or terms and conditions of coverage
Plan must meet requirements of IRC section 79
Chapter 10Tools & Techniques of Life
Insurance Planning
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Group Insurance
Disadvantages Employees have no guarantee the group coverage will be continued
When an employee is terminated, the coverage is lost. Although a conversion policy is available, it is usually quite expensive
By formula and design, group coverage ceases at retirement or reduces significantly
Employees may be lulled into complacency thinking the coverage is all they need
Tax implications The employee must report and pay income tax on the economic benefit of coverage
in excess of $50,000
Chapter 10Tools & Techniques of Life
Insurance Planning
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Group Insurance
Tax implications (cont'd) Computing the economic benefit
Step 1 – Calculate the amount of total group coverage
Step 2 – Subtract $50,000
Step 3 – Divide result by 1,000
Step 4 – Multiply result by Table I Rate to arrive at monthly taxable income
Step 5 – Sum the 12 months of taxable income (taxable income for the year)
Step 6 – Reduce taxable income by any employee contributions towards coverage
Chapter 10Tools & Techniques of Life
Insurance Planning
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Group Insurance
5 YearAge Bracket
Under 2525 to 2930 to 3435 to 3940 to 4445 to 4950 to 5455 to 5960 to 6465 tp 69
70 and above 2.06
0.230.430.661.27
0.080.090.100.15
Cost per $1,000 of ProtectionFor One-Month Period
$0.050.06
Table IUniform Premiums For $1,000 of
Group Term Life Insurance Protection
Rates Applicable To Cost of Group Term Life Insurance
Chapter 10Tools & Techniques of Life
Insurance Planning
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Group Insurance
Tax implications (cont'd) Under 10 lives Group Term Life Plans
Coverage must be provided for all full time employees Amount of coverage must be computed:
As a uniform percentage of compensation
On the basis of coverage brackets as established by the employer
No bracket may exceed 2 1/2 times the next lower bracket
The lowest bracket must be at least 10% of the highest bracket
A separate schedule of coverage may be established for those over age 65
Evidence of insurability, if required, is limited to a modified questionnaire
Plan must not discriminate in favor of key employees
Chapter 10Tools & Techniques of Life
Insurance Planning
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Group Insurance
Tax implications (cont'd) Eligibility Nondiscrimination Rules
Plan benefits 70% or more of all employer’s employees
At least 85% of the plan participants are not key employees
Employer specified classification must be nondiscriminatory (as determined by the IRS)
If the plan is found to be discriminatory the income tax exclusion for the first $50,000 is lost
Definition of key employee An officer whose compensation exceeds certain limitations or Employee owing ½% interest and one of 10 largest interests or More than 5% owner or More than 1% owner and compensation greater ten $150,000
Chapter 10Tools & Techniques of Life
Insurance Planning
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Group Insurance
Tax implications (cont'd) Amounts reportable income are subject to FICA and FUTA
Beneficiary receives proceeds income tax free
Premiums are income tax deductible by the employer as an ordinary and necessary business expense
Premiums for partners and or sole proprietors are not deductible
Proceeds are includible in the insured’s estate if: They are payable to the estate The insured held any “incidents of ownership” in the policy
Group term proceeds may be exempt of certain requirement are met
Chapter 10Tools & Techniques of Life
Insurance Planning
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Group Insurance
Tax implications (cont'd) If the insured makes an absolute assignment of their rights a gift is made.
Subsequent premiums made by the employer is also considered gifts
Requirement (cont'd) ERISA
Plan must be established and maintained in writing
Plan must provide for one or more fiduciaries who administer the plan
Plan document must provide a procedure for amending the plan
Plan must provide a claims review procedure
Chapter 10Tools & Techniques of Life
Insurance Planning
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Group Insurance
Requirements (cont'd) IRC Section 79 Requirements
Plan must provide a death benefit that meets the definition of life insurance
The plan’s benefits must be provided to a group of employees as compensation for services
Policy carried directly or indirectly by the employer
The amount of insurance for employees must be computed under a formula that precludes individual selection
Chapter 10Tools & Techniques of Life
Insurance Planning