Group Life Insurance - survivor benefits

Life Insurance

Employee Life Insurance

Some schedules provide a specific amount of employee life insurance (i.e. $10,000) to assist with the financial costs associated with the death of an employee (i.e. funeral burial). Others are designed to replace income .

The benefit schedule can be different for different classes of employees.

Since group insurance avoids anti-selection, generous amounts can be provided without medical evidence.

Dependent Life Insurance

Dependent life insurance assists employees with the financial costs associated with the death of a dependent (i.e. funeral, burial). A common schedule is $10,000 for the spouse and $5,000 for each child with coverage for children commencing 1 day after birth.

Optional/Voluntary Employee/Spousal/Dependent Life Insurance

Employees may choose an amount of coverage, normally up to $250,000 (with a higher limit for large groups). Medical underwriting is limited to an application which includes medical questions, and may include an attending physician's report. Rates can be based on gender, age and smoking status.

This benefit enables employees to purchase life insurance in a comfortable setting, at discounted rates and without any policy fees.

Retiree Life Insurance

Many employers provide sufficient retiree life insurance to cover final expenses.

Ensure that retiree life claims are communicated to the pension administrator.

Waiver of Premium

Most policies waive the life insurance premium while the employee is totally disabled and under the age of 65. Some extend the waiver to dependent life insurance and optional/voluntary life insurance. Some use the less restrictive definition of "disability" contained in their long-term disability policy for the purpose of waiving the life insurance premium, given that the same insurer provides both benefits.

Facilitate an application for waiver of premium as soon as an employee has been disabled for 6 months. Most policies require that the waiver of premium be applied for within 12 months of the date of disability and while the policy is in force.

Conversion

Most group insurance policies permit employees who terminate prior to age 65 to convert up to $200,000 of their group life insurance coverage to an individual policy without providing medical evidence. This is of benefit to employees in poor health who would otherwise not qualify for standard rates.

The policies offered are:

one year convertible term insurance
term to age 65
permanent life insurance

Carefully document and promptly facilitate any request for conversion information. The opportunity for conversion only exists during the 30 days immediately following termination.

Since conversions are charged against your life insurance experience rating and healthy employees are able to get a lower competitive cost, it is prudent to ask your benefits broker to discuss all options with terminating employees interested in conversion.

Taxation

The Income Tax Act (s.18(1)(a)) and (s. 67) allow an employer to deduct premiums paid for group life insurance. The premiums paid by the employer are a taxable benefit to employees based on the average premium rates for employees under the policy. The regulations prohibit any differentiation in the premium rates based on age or gender. Claim payments are non-taxable to beneficiaries.

The first $10,000 of a death benefit paid directly to the spouse or designated beneficiary of a deceased employee is non-taxable to the beneficiary, yet is a fully tax deductible business expense to the employer. Consider taking advantage of this when structuring your benefit program.

The Income Tax Act (s.56(1)(a)(iii)) requires that any amount received on account of or in lieu of payment of a death benefit be included in income for the year.

The Income Tax Act (s.248(1)) defines a death benefit for a taxation year as the amount or amounts received in the year by any person upon or after the death of an employee in recognition of his service in an office or employment minus . . . [an] amount equal to the employee's salary, wages and other remuneration for the last year in that office or employment for which he received any remuneration of $10,000 (whichever is the lesser), minus amounts deductible in computing for previous years, the death benefits received in respect of his service in that office or employment (IT508R).

The $10,000 deduction is available for each particular office or employment.

The taxable death benefit for each beneficiary is calculated by subtracting the $10,000 deduction and then divided the result among the beneficiaries in the same ratio as the death benefit was apportioned.