Can a company require you to pay for or Opt in to their Life Insurance plan?

UPDATED: Jun 16, 2016

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Recently received the message below from our payroll department.  They are saying we can not opt of the policy even though we are now being forced to pay the taxes over the new/2016 $50,000 limit and we can not keep the policy if we leave the company – basically, employees now have a new tax liability and are being forced to take coverage over the $50,000 company paid portion – is this allowed?: 

As a benefits eligible employee, you are covered for group term life insurance.

  • Associates earning $50,000 or more annually – The benefit is four (4) times your Annual Salary to a maximum of $500,000
  • Associates earning less than $50,000 annually – The benefit is one (1) times your Annual Salary to a maximum of $50,000  

XYZ CO pays 100 percent of the premium for your basic life insurance coverage. IRS rules require employees to pay tax on the value of the benefit premium in excess of $50,000. The amount of taxable income on coverage in excess of $50,000 is known as “imputed income.”  (Imputed income is noncash income) The value of the noncash income listed as GTL on your pay statement is added to your taxable income. Note: The amount of life insurance coverage is not taxable; however, the premium value of the life insurance coverage is taxable.

Under IRS regulations, the pre­mium value for the first $50,000 of employer-paid group term life insur­ance is exempt from income and Social Security taxes.

Additionally, the life insurance proceeds (the amount paid to your beneficiaries in the event of your death) are not taxed. There is no cash value of this term life insurance and associates cannot opt out of employer paid benefits


Asked June 16, 2016

2 Answers

It looks like your company has decided to offer their employees life insurance in the form of a GTL (group term life) policy. This is good news for all involved since coverage provided under a GTL is generally cheaper than what you are able to purchase on your own. Since the company is essentially buying life insurance policies in bulk, they get a discount that is passed on to you.

Based on the email you provided from the payroll department, it looks like you are not able to opt out of the group term life insurance policy. Employers need a certain number of people to participate in order to get a discounted rate, so this sometimes means mandatory participation for all employees.

If you are concerned about the possibility of your employer making money off your death, do not worry; that is not how this works. While the employer is the owner of the policy, you will still be able to list your own beneficiary just like you would if it was a policy you purchased by yourself.

Unfortunately, two of the main features of group term life are the inability to choose benefits and required participation. In other words, you are not able to change anything that has been set up for the GTL policy. Yes, you will have to pay taxes on the benefit amount exceeding $50,000, but the good news is that amount probably will not be as much as you think. Intuit has a handy tool to help you figure out what your taxable amount will be here.

If your current income is $60,000 and you are 40-44 years old, this is what your imputed income would look like:

  • Annual salary: $60,000
  • Benefit amount is 4 times salary: $240,000
  • Subtract non-taxable amount of $50,000: $190,000
  • Divide remaining amount by 1,000: $190
  • Multiply above result by value related to age ($.10 for 40-44 years): $19
  • Multiply last result by months of coverage (June-December is 7 months): $133
  • $133 is the amount your company would add to your W-2 as imputed income.

On the other hand, if you earn less than $50,000 per year, you will not have to pay taxes on anything. The group term life policy will come at absolutely no cost to you.

Not only is it permissible for your company to require your participation in this program, it is not uncommon for employers to set up this type of benefit. The fact that you could be required to pay taxes on what is considered additional income might seem inconvenient. However, the truth is these policies generally help more people than they hurt. Employer-purchased group term life policies are a tremendous help to people with health issues who cannot purchase life insurance on their own, or may not be able to afford an adequate amount of coverage for their family's needs. Really, the biggest downside to GTLs is that they are rarely available for transfer if you leave the company.

Answered June 24, 2016 by AllstatePals

When it comes to a company requiring you to pay for or opt into their life insurance plan, it is not an option. A company can not force you into paying for a life insurance plan offered by their company. Life Insurance is a popular benefit offered by companies, and although it is often a great option for employees because they are offered a significantly lower rate being part of the company, it is not a requirement.

It is tricky if you consider opting for life insurance through your company because if your situation in the company changes, you may lose your life insurance policy. This may put you in a sticky situation if you are at a certain age where life insurance may be difficult to obtain.

So the answer is simple, no, a company can not require you to pay for their life insurance Plan; however, it may be a good option for you and your family to consider it.

Answered June 23, 2016 by GWGLife

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