Life insurance is big business. As of 2019, over 20 million Canadians owned life insurance coverage worth over 5 trillion in total value. However, in spite of such widespread use a trillion dollar industry, there can still be uncertainty about how group life insurance works in Canada.
There are two ways to purchase life insurance. Almost 20% of life insurance holders in Canada are covered under employer provided life insurance – namely, group life Insurance.
Most employers will deduct the premiums required from the monthly paychecks of individual employees. A number of companies will cover a part, or all, of the premiums as part of their employee benefit packages. As a result, and due to group rates, employees and their named dependents can receive a high amount of coverage for nominal costs.
There are two types of group life insurance coverages:
The employers do get certain taxable benefits from what they provide for employees. For example, premiums paid for group life insurances are tax deductible in all cases where those premiums are not being paid for group term insurance (see definition below) or (optional) dependent life insurance.
Insurance can either be term (that is, it stays in place for a specific period of time, over which the premiums do not change very much) or whole (which refers to long term coverage that will last for the duration of your life and will pay out benefits to dependents, or vice versa, at any stage of life).
Group life Insurance is usually set up as a term life insurance which typically does not last for more than a set period beyond the terms of the employment, unless the company decides to extend the coverage to past employees. This means that if something were to happen post the date when the employer’s group life insurance coverage ends, no benefits are paid out.
Group life insurance may not be term insurance in cases where a lump-sum premium has either been paid or become payable. Lump-sum premiums represent all or part of premiums paid on life insurances for any period that extends more than 13 months after the payment of the premium (or conversely, more than 13 months after the time that the premium became payable, provided the premium is actually paid.)
Under group term life insurance policies, employers will pay for policy dividends, experience rating refunds and any payouts after the death or disability of an employee (current, former or retired) and their named and covered dependents.
Other Canadians, not covered by Group Life Insurance, can buy life insurance on their own, privately, typically using an advisor who can guide them towards the best options available in the market. This group represents just over 80% of the total number of people who have life insurance coverage.
People in the private market, unlike in the case of Group Life Insurance, do have the option of buying either term life insurance or whole life insurance. Term life may be part of a strategic plan – for example, buy a 20 year policy after a child is born to give him/her some protection in the event of an accidental death.
Many private buyers, though, opt for whole life insurance. The policies cost more since they last for whole lifetimes, but they are ultimately worth it.
Calculating the benefits payable under term Group Life Insurance requires some complex calculations, which can be summarized as follows at a high level:
Many situations that go beyond these general guidelines require a more detailed calculation. Don’t try to tackle those situations without expert help.
Canadian employers must pay attention to further details in order to be in full compliance.
Any benefit that is taxable is also pensionable. Being a non-cash benefit, however, it is not insurable. Employers must deduct income tax and CPP contributions, but not the EI premiums, for the purposes of payroll deductions.
CRA requires employers to report benefits for current employees, as well as those who are on a leave of absence (e.g. maternity leave) on their T4 slips (https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t4.html). Use box 14 (Employment income) and the “Other information” area (code 40) at the bottom.
For former employees and retirees, employers must use the “Other information” area (code 119) on the T4A slip to report benefits (https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t4a.html).
It is important to note that all amounts should be reported by employers, since the $500 reporting threshold, as described in Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary (https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4157.html).
Administrators or trustees of a multi-employer plan who provide taxable benefits under the plan to employees, former employees or retirees, must report all benefit amounts above $25 using the “Other information” area (code 119) on the T4A slip.
Currently, employers paying Group Term Life Insurance premiums to cover retirees are not required to report premiums in amounts higher than $50, provided it’s the only income reported on the T4A slip. The recipients must report those amounts on their personal income tax and benefits tax returns.
Based on 2020 annual revenues, the five largest life insurance companies in Canada were:
As described above, there are a number of details that must be carefully reviewed when setting up life insurance plans, and compliance guidelines must be followed on an ongoing basis.
To receive proper guidance, consult an expert. We at the Sim Gakhar insurance agency (https://www.simgakhar.com/insurance/life-insurance/) have been advising individual and corporate clients on getting the best life insurance plans based on their needs and budgets.
Call us at (647) 889 7290 to book a call today!
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