When you buy a life insurance policy, you’re probably thinking about the benefits it will provide in the event of your death. But what about if you pass away while employed by your employer? Do they have to pay taxes on the policy? The answer is surprisingly complicated, and depends on a few factors. In this blog post, we’ll explore the details of how an employer is taxed on split dollar life insurance policies. We’ll also give you some tips on how to navigate these tax laws if you fall into this category.
What is a Split Dollar Life Insurance Policy?
A split dollar life insurance policy is a type of insurance policy that provides death benefits to the beneficiary in equal parts, regardless of when the death occurs. The policy is also known as a “pay as you go” policy because the beneficiary receives benefits based on how much money they have deposited in the policy at any given time.
Split dollar life insurance policies are typically offered by employers as part of their employee benefit package. The benefits provided by a split dollar life insurance policy can be important to employees who may face a longterm financial burden if they are unable to continue working due to illness or injury.
When an employer sponsors a split dollar life insurance policy for its employees, it assumes the responsibility for paying all benefits that are payable under the terms of the policy. As such, an employer will be taxed on any cash surrender value that is deposited into the policy during each tax year. This tax calculation takes into account both the annual premium payment and any additional funds that are deposited into the account during the year.
How are Employers Treated When Purchasing Split Dollar Life Insurance?
Employers who buy split dollar life insurance policies are taxed on the value of the coverage, not on the premiums paid. The employer pays tax on the entire face amount of the policy, regardless of how much is actually covered. This means that an employer can save money by buying a lower-priced policy with lower coverage than they need.
When an employee dies, their family members may be able to receive benefits from their life insurance policy. These benefits may include payment for funeral and burial expenses, income replacement duringa period of unemployment or disability, and child support payments. The estate tax may also be payable on the proceeds of a deceased person’s life insurance policy.
An employer can deduct premiums paid for split dollar life insurance from an employee’s taxable income. This reduces the amount of taxes that must be paid by the employer on the employee’s wages.
What Are The Tax Implications of a Split Dollar Life Insurance Policy?
If you are an employee and your employer offers split dollar life insurance, you may be taxed on the benefits you receive. The way split dollar life insurance works is that your employer pays the entire policy premium, and then each month, they pay a fixed amount of money to the insurance company to cover any claims made on your behalf. For example, if your employer pays $100 per month to the insurance company, and there are no claims made on your behalf during that month, then your employer would have paid $1,000 in total during that year. If there were a claim made in that month, then the $100 paid by your employer would be credited towards the $1,000 owed to the insurance company. If you die while covered under a split dollar life insurance policy from your employer, then any benefits you received (e.g. monthly payments) will be taxable as income.
Conclusion
If you’re currently working and have split dollar life insurance, there are a few things you should know about how your employer is taxed on the policy. First of all, the employer must include the policy in your taxable income when calculating your salary and wages. Secondly, if you die while covered by the policy, the beneficiary of the policy will be taxed as if they received their entire benefit from the policy — this can result in a large tax bill. Finally, if you cancel or surrender your split dollar life insurance coverage before it expires, any unused benefits will be taxable at ordinary income rates. Thankfully, these rules are straightforward to follow and only apply to split dollar life insurance policies that are taken out after January 1st, 2017.
