Tax Consequences of 3rd Party Premium Payment

Nov 23, 2015

  1. Ann H
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    Please forgive my ignorance on the subject. My expertise is group health insurance, not life insurance, so I appreciate your input!

    A client wants to purchase $1,000,000 term life policy insuring himself, with the beneficiary as his wife. This is not a group term policy. His employer (a church) wants to pay the premium.

    1. If the employer pays the premium, is the payout taxable when the insured dies?
     
    Ann H, Nov 23, 2015
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  2. STIBROKER
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    STIBROKER Like My post and enter the DRAWING,,,, Moderator

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    No should not be a problem.....but I would have the church pay the insured and the insured send in the prem.....annually.......
     
  3. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    If the church is paying the premium, and the policy owner is NOT the church, and the beneficiary is set by the policy owner (also not the church), then you could be describing an "executive benefit plan".

    http://finsecurity.com/finsecurity/pdfs/compliance/2b4-02.pdf

    The death benefit won't be taxable, but the premiums can be added to the employee's income. That would make the premium taxable each year to the employee.
     
    DHK, Nov 23, 2015
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  4. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    As long as he is listed as the Owner, it would not be taxable. However, the premium payments that the church makes would be considered taxable income for your client.

    Just be sure that the Insured is also listed as the Owner or you will have a Goodman Triangle and the DB could be taxable.
     
    scagnt83, Nov 23, 2015
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  5. BNTRS
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    Provided the employee recognizes the premium payment as income and pay income taxes on that amount death benefit is not taxable.

    Depending on the insurance company you plan on placing this with, you could potentially speak to their "advanced sales" department to double check on this. Most are staffed with tax attorneys who answer these sorts of questions everyday.
     
    BNTRS, Nov 23, 2015
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  6. Ann H
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    Thanks, guys, great answers. I think I will suggest to the church that they just increase payroll and have him pay the premium.

    It won't matter in the long run, because it's taxable income to him anyway, and it will just be a cleaner paper trail. After all, churches don't pay income tax, so the tax-deductible feature isn't an issue. And the minister pays little taxes since ministers get breaks for large housing allowances.

    It's cleaner this way, and I would hate to see a widow trying to explain this to an IRS agent!
     
    Ann H, Nov 23, 2015
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  7. term2u
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    Great info and one of the MANY reasons why I love this forum. I was actually wondering about this very question the other day, so it looks like perfect timing.

    One last question - Since the employee (minister) will be paying taxes on the premiums that the church will be providing towards his life insurance policy, does that mean in a business setup, the premium would be deductible to the business? I'm assuming so, but just making sure. Thanks!
     
    term2u, Nov 23, 2015
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  8. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    Yes, in a business set up the premium would be considered a deductible business expense. Essentially it is treated for tax purposes (for the business) just like paying the employee a bonus.

    Tax consequences for the employee would depend on how the Ownership of the policy is set up.

    ----------

    That is certainly the cleanest way to do it. Just give him a bonus and let him purchase the policy on his own without any extra layers of complication.

    The only reason no to do it that way, would be if the church was listed as Bene or Owner, which in this case they would not be.
     
    scagnt83, Nov 23, 2015
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  9. donamese
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    $1,000,000 insurance policy on a minister, pays to pray apparently!
     
    donamese, Nov 30, 2015
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  10. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    You don't understand anything about churches or life insurance, do you?

    First, can the minister's wife "take over" the church? That depends on their denomination. In the majority of cases, it's no. However, the minister's spouse is OFTEN giving full support to the ministry as well.

    So, I think it's right and proper for the church to afford a policy for the well-being of the minister's spouse, without it being an undue hardship on the church itself, should something happen to the minister. Life insurance is the PERFECT way to do this.

    BTW, $1,000,000 only guarantees $50,000/year of income based on 5% earnings.

    Oh and ministers may be exempt from social security according to IRS publication 517... so it can make that much MORE sense for the church to buy life insurance on the minister - even a permanent policy, if it was in the budget.

    https://www.irs.gov/publications/p517/ar02.html#en_US_2014_publink100033573
     
    DHK, Nov 30, 2015
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