Definition of Life Insurance
What is life insurance?
Life insurance is a policy that people can pay for in order for their family, or other beneficiaries, to receive money when they pass away. People who have life insurance will pay a single premium or regular premiums during their lifetime to pay for their policy.
Life insurance is intended to provide employees’ dependents financial assistance in the event of their death. The amount of the policy they purchase is intended to reflect the needs of their family. This includes paying off bills and debts, like medical bills and funeral expenses. It can also be intended to provide funds to pay off a mortgage, estate taxes, or cover a child’s education.
Why is life insurance important to a small business?
Life insurance is a desired employee benefit that offers peace of mind to eligible employees and their families. Other advantages of life insurance are that it:
- Is usually affordable through group life insurance
- A talent attraction and retention tool through its connection to helping family and children
- Improves individual peace of mind and, thus, productivity
- May offer tax deductions for employers
Tax benefits of offering life insurance
Companies who meet the non-discrimination requirements for life insurance can generally exclude the cost of up to $50,000 for group-term life insurance from the wages of an insured employee.
The company can also exclude the same amount from the employee’s wages when calculating the employee’s social security and Medicare taxes. Lastly, the company does not have to withhold federal income taxes or pay the Federal Unemployment Tax on any group-term life insurance they provide to an employee.
However, if the cost of the company’s group-term life insurance is more than $50,000 worth of coverage, the company must include it in their employee’s wages — minus the amount the employee paid toward the insurance.
For more information, check out the IRS website’s section on taxing fringe benefits.
What is the history of life insurance?
The earliest forms of life insurance began around 100 BCE in ancient Greece and Rome.
Back then, Roman military general Gaius Marius thought of the idea to create a “burial club” for fallen soldiers. If one of them was killed on the battlefield, the survivors would contribute to a pool to pay for funeral expenses.
The idea applied to just soldiers initially, but later became more widespread and used by everyday citizens. People started to not just provide funds for funeral expenses, but financial safety nets for family members of those who fell in battle. These are the origins of life insurance.
Other terms similar to life insurance that can assist you
- Premium: A fixed dollar amount paid per month to an insurer for health insurance coverage.
- Death benefit: Amount insurer pays when the policyholder passes away.
- Beneficiaries: The people or entities that will receive the death benefit when the insurer passes. The insurer can choose for it to all go to a single person, or divide it among different people and entities.
- Imputed Income for Group-Term Life Insurance: Imputed income are benefits employees receive that are not part of their salary or wages, but are still taxed as part of their income.
- How to Calculate Imputed Income for Life Insurance: Imputed income amounts for Basic and Voluntary Life plans are calculated using the volume of coverage on the plan (V) and an age-banded rate (r), which is determined by the IRS using the employee’s age on the last day of the employee’s tax year.
Summary of the definition of life insurance
Life insurance is a benefit that employees can enroll in that allows them to ensure their loved ones receive a financial payment when they, the insurer, passes.
This is a popular employee benefit that can help employers attract and retain talent and provide peace of mind for their employees.
Similar glossary definitions you must know
- Employee benefits: Employee benefits are perks provided to employees in addition to their regular wages or salary.
- Short-term disability: Short term disability is an insurance benefit that provides some sort of payment or income for injuries or illnesses sustained off the job that leave an employee unable to work for a certain amount of time.
- Long-term disability: Long-term disability insurance can provide employees with crucial assistance for meeting financial obligations in the event of significant illness or injury.
- Hospital indemnity insurance: Hospital indemnity insurance can help cover expenses for hospital admissions that might not be covered by other insurance plans.