J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

2.10 Life Insurance Benefits

Company-financed insurance gives employees benefits at low or no tax cost.

Group life insurance.

Group insurance plans may furnish not only life insurance protection but also accident and health benefits. Premium costs are low and tax deductible to the company while tax free to you unless you have nonforfeitable rights to permanent life insurance, or, in the case of group-term life insurance, your coverage exceeds $50,000 (3.4). Even where your coverage exceeds $50,000, the tax incurred on your employer’s premium payment is generally less than what you would have to pay privately for similar insurance.

It may be possible to avoid estate tax on the group policy proceeds if you assign all of your ownership rights in the policy, including the right to convert the policy, and if the beneficiary is other than your estate. Where the policy allows assignment of the conversion right, in addition to all other rights, and state law does not bar the assignment, you are considered to have made a complete assignment of the group insurance for estate tax purposes.

The IRS has ruled that where an employee assigns a group life policy and the value of the employee’s interest in the policy cannot be ascertained, there is no taxable gift. This is so where the employer could simply have stopped making payments. However, there is a gift by the employee to the assignee to the extent of premiums paid by the employer. The gift may be a present interest qualifying for the annual ...