Definition of Imputed Life Insurance

Imputed life insurance can create additional tax burdens on you and your family.

Imputed income is generally regarded by the Internal Revenue Service (IRS) as an employer benefit disguised as a tax break or tax benefit. The IRS allows some employer benefits to be deducted from income taxes. However, when it comes to life insurance, the IRS is very specific about how much employer life insurance an employee can purchase on a tax-preferred basis.

Identification

The IRS defines imputed income in regards to life insurance premiums as any amount of premium payments that exceeds the premiums necessary to support $50,000 worth of employer group term life insurance.

Significance

When you purchase more than $50,000 worth of group life insurance, you will lose the ability to make payments on a pre-tax basis. The pre-tax nature of group term life insurance is often a major benefit to purchasing life insurance through your employer.

Warnings

Any death benefit amount over $50,000 that you purchase from your employer is subject to income tax as well as Medicare and Social Security taxes. The taxes are based on premiums you pay to support the death benefits that exceed $50,000. That means the premiums will be received as cash instead of paid as pre-tax premium payments.

References

• Internal Revenue Service: Group-Term Life Insurance
• "Practicing Financial Planning for Professionals, Practitioner's 10th edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007