Group life and disability insurance through work

How it works

Group term life insurance paid by the employer is tax free to the worker up to $50,000 of coverage; the cost of coverage above that, figured from an IRS age table, is added to the worker's taxable wages and shows up on the W2. Extra coverage bought by the worker is usually priced in age bands and often needs no medical exam up to a set amount. Disability coverage replaces part of pay, commonly 60 percent, after a waiting period. When the employer pays the premium, benefits received are taxed as income; when the worker pays with after tax dollars, the benefits come tax free. Group coverage normally ends at separation, though some plans allow the worker to convert or port it at a higher price.

What it gives

The base coverage costs the worker nothing and usually requires no health questions.

Payroll deduction and group pricing make extra coverage simple to add.

Disability benefits paid from after tax premiums arrive with no income tax.

What it costs, or where the catch is

Coverage usually ends when the job does, and a worker whose health has changed may not get a new policy elsewhere.

Employer paid disability benefits are taxable, so 60 percent of pay becomes less after tax.

Imputed income on coverage above $50,000 raises the taxable wages on the W2.

A worked example

Hugo earns $80,000 and his employer provides life coverage of two times pay, which is $160,000. The first $50,000 is tax free, and the IRS table cost of the remaining $110,000 for his age, about $1.80 per $1,000 a year, adds about $198 to his taxable wages. His long term disability would pay 60 percent of pay, $48,000 a year, and since the employer pays the premium that $48,000 is taxed as income.

Where it goes wrong

The common miss is treating the free group life policy as the only life insurance a family has, and then losing it on the day the job ends.

Who confirms it for you

For your own numbers, an insurance agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Publication 525, Taxable and Nontaxable Income. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.