11. Which of the following statements about the federal income tax law in relation to $100,000 worth of group Term Life insurance coverage through an employer-sponsored plan?
Answer: D
Death benefits are income tax free to named beneficiaries.
Death benefits from a group Term Life insurance policy are not subject to federal income tax for the beneficiaries. This means that when a named beneficiary receives the payout upon the death of the insured, they do so without incurring income tax liabilities.
A) Employees must not pay tax on premiums paid by an employer.
This statement is misleading. While employees typically do not pay taxes on premiums paid by an employer for group Term Life insurance, they may still be taxed on the value of the coverage that exceeds $50,000. Thus, this option does not accurately represent the tax implications for all employees.
B) Employees must pay tax on the premiums for the first $50,000 of group Term Life coverage.
This statement is incorrect. Employees are not taxed on premiums for the first $50,000 of group Term Life insurance coverage. Premiums for this amount are generally considered a non-taxable fringe benefit, making this option false.
C) An employer can deduct a premium for tax purposes only if the employer is also the beneficiary of the insurance.
This statement is inaccurate. Employers can generally deduct the cost of premiums for group Term Life insurance regardless of whether they are the beneficiary. Therefore, this option does not reflect the actual tax treatment of such premiums.
D) Death benefits are income tax free to named beneficiaries.
This statement is correct. Death benefits received from a group Term Life insurance policy are exempt from federal income tax for the beneficiaries, making it the accurate representation of the tax implications associated with such insurance.
Conclusion
The correct answer, D, clearly states that death benefits are income tax free to named beneficiaries, which aligns with IRS regulations regarding life insurance payouts. Options A, B, and C contain inaccuracies regarding the tax treatment of life insurance premiums and benefits, confirming that they do not meet the criteria of correctness in this context.