What’s at Stake for Your Employer When They Take Insurance Coverage for You

What’s at Stake for Your Employer When They Take Insurance Coverage for You

Currently, it has been a trend for companies to take out insurance coverage for their top executives. However, unlike ordinary types of insurance where the insured or his family members are appointed as beneficiaries, the employer is usually designated as the beneficiary in this case. When there is an employer-owned life insurance, the employer shall recoup the proceeds of the insurance in the event an insured employee dies. Here are some useful information you need to know about employer-owned life insurance:

The employer must receive notice of the insurance and it must give its consent to the coverage.
 
The employee should be aware that his employer is the direct or indirect beneficiary of the death proceeds. He should also give his consent to being the insured in the employer-owned life insurance.

The law requires annual reporting of employer-owned contracts for each year the contract is owned. Form 8925 is used for the report to the Internal Revenue Service and it is attached to the federal tax return of the policyholder. Form 8925 should contain the following information: number of employees at yearend, number of insured employees under the contract, total amount of insurance under the contract and attestation that valid consent has been obtain for each insured. It should also include the following details of the policyholder: name, address, type of business and taxpayer ID number.

The required notices and consents should be given and obtained before the policy can be issued.

These steps should be followed so that the employer can reap the death benefit proceeds free from income tax. The documents that can substantiate that these procedures were followed should also be kept properly.

If you are an employer who availed of an employer-owned life insurance on your employees, you need to coordinate with your insurance company to insure that these procedures have been complied with. There have been changes in the requirements of the law and it is possible that when you processed the insurance, you were still covered by a different set of regulations. This is essential so you can enjoy the tax-free benefit this type of insurance provides.

Most of the time, an employer takes out this type of insurance so that it will be compensated in the event of an untimely loss of a highly-valuable employee.

An employer-owned life insurance with the employee as the insured is treated as an employee benefit. Thus, the premiums paid by the employer for the insurance are tax deductible.

The employer-owned life insurance policy is held by the company or the employer as an asset. When the insured dies subsequently, the company will be able to collect proceeds from the insurance company which can form part of the assets of the employer.

While this type of insurance is owned by the employer and the company is designated as the beneficiary entitled to receive the death benefit proceeds, some employers also share part of the proceeds with the estate of the deceased.