Does Group Term Life Insurance Have a Cash Value?
Clarify how group term life insurance works. Understand why this common employer benefit focuses on protection, not cash accumulation.
Life insurance serves to provide financial protection for beneficiaries, offering a financial safety net after the policyholder’s passing. This financial support can help cover various expenses, from daily living costs to outstanding debts. Different types of life insurance policies exist, each designed to meet distinct needs and financial goals.
Understanding Group Term Life Insurance Coverage
Group term life insurance is a type of life insurance commonly provided by an employer or organization to its employees or members. This benefit offers coverage for a specific period, often tied to the duration of employment. Its purpose is to provide a death benefit if the insured individual passes away while the coverage is active. Coverage usually ceases when an individual’s employment with the providing entity ends.
Understanding Life Insurance Cash Value
Cash value refers to an accumulated savings or investment component found within certain types of permanent life insurance policies. These policies, such as whole life or universal life insurance, allocate a portion of each premium payment towards building this value. The cash value grows on a tax-deferred basis over the life of the policy.
Policyholders can access this accumulated cash value by taking out loans against it or making direct withdrawals. Alternatively, the policyholder can surrender the policy, canceling the coverage in exchange for the available cash value, minus any surrender charges. This feature distinguishes permanent policies from those offering only death benefit protection.
Why Group Term Life Insurance Has No Cash Value
Group term life insurance does not have a cash value component. This absence is inherent to its design as a “term” policy, meaning it provides coverage for a specific duration. Unlike permanent life insurance policies, group term plans do not allocate a portion of premiums towards a savings or investment fund.
The structure of group term life insurance is focused on providing temporary coverage at a lower cost compared to permanent policies. Since there is no built-in savings element, the policy does not accumulate any value that can be borrowed against or withdrawn by the policyholder. This design is why group term life insurance lacks a cash accumulation feature.
Taxation of Group Term Life Insurance
The taxation of group term life insurance involves specific rules for both employees and beneficiaries. The cost of the first $50,000 of employer-provided group term life insurance coverage is not considered taxable income to the employee. This threshold allows a significant portion of coverage to be received tax-free.
However, if the employer provides coverage exceeding $50,000, the cost of the coverage above this limit is considered “imputed income” and is taxable to the employee. This imputed income is calculated using tables provided by the IRS and is reported on the employee’s W-2 form, in Box 12 with code “C.” Even though the employee does not directly receive this money, it increases their taxable wages and is subject to Social Security and Medicare taxes.
Upon the death of the insured, the death benefit paid to the beneficiaries from a group term life insurance policy is tax-free. This means beneficiaries do not have to pay income tax on the lump sum received. This tax-free status of the death benefit is an advantage of life insurance for financial planning.