How Much Life Insurance?

Most group-term policies offer either a set amount of insurance (for example, a \$10,000 policy for each employee) or are based on the employee's salary (for example, policy values of one, two, or three times the employee's yearly salary). In some cases, you can allow employees to purchase life insurance in \$1,000 increments, the cost of which is based on their age.

 Your business offers life insurance that can be purchased in \$1,000 increments. The insurance vendor gives you the following rate schedule per thousand dollars of coverage purchased. Employees under 30 pay \$.20 per thousand per month; employees 30 - 40 pay \$.22 per thousand per month; and employees 40 - 50 pay \$.30 per thousand per month. Carl, age 27, wants to purchase \$5,000 of life insurance. He will have to pay 5 times \$.20 = \$1.00 per month for his insurance. Janet, 30, will have to pay 5 times \$.22 = \$1.10 for the same amount of coverage.

Watch out for the \$50,000 threshold. The cost of employer-provided group-term life insurance in excess of \$50,000 is taxable to employees. That means that if you pay the premiums for employees' life insurance, any premiums you pay for more than \$50,000 in coverage for one employee count as taxable income for that employee. Not only will the employee pay income taxes on it, you'll both have to pay payroll taxes on it as well.

 Sports Heaven, Inc., pays the premiums on a \$120,000 group-term life insurance policy on Karen, who is 46 years old. The monthly rate for employees in the 45-49 age group under the plan is \$.29 per thousand. If Karen makes no contribution toward the plan, the cost of the \$70,000 coverage (\$120,000 minus the \$50,000 exclusion) counts as taxable income for Karen. The amount included in taxable income would be \$243.60 for the year (70 [thousand-dollar increments] times \$.29 [per thousand] times 12 [months]). If Karen contributes \$10 per month toward the coverage, then the taxable amount included as gross income for the year is \$123.60 (\$243.60 minus \$120 [Karen's contribution]).