254 / May any part of a benefit under a policy be treated as group term life insurance if the policy also provides permanent benefits? If so, what part?

Yes. A policy that provides a permanent benefit may be treated in part as group term life insurance if (1) the policy or the employer designates in writing the part of the death benefit that is group term life insurance, and (2) the part of the death benefit designated as group term for any policy year is at least the difference between the total death benefit under the policy and the employee’s deemed death benefit (defined below) at the end of the policy year.¹A permanent benefit is an economic value extending beyond one policy year that is provided under a life insurance policy.² For example, paid-up or cash surrender values are permanent benefits. The following features are not permanent benefits:

(1)     a right to convert or continue life insurance after group life insurance coverage terminates;

(2)     any other feature that provides no economic benefit to an employee other than current insurance protection; and

(3)     a feature providing term life insurance at a level premium for a period of five years or less.

To determine whether a policy provides a permanent benefit, it is necessary to determine what a policy is. Under the broad definition of “policy” provided in the regulations ( Q 241), if permanent benefits are provided (by reason of the employment relationship) under unrelated plans to members of a group provided group term life insurance is issued by the same insurer or an affiliate, they would appear to be permanent benefits under the same policy that provides group term life insurance.

If a policy providing group life insurance provides permanent benefits, the cost of the permanent benefits, reduced by amounts paid for them by an employee, but not by amounts paid for group term life insurance, is included in the employee’s income according to a formula. The formula for determining the annual cost of the permanent benefit is: X(DDB2 – DDB1). DDB2 is the employee’s deemed death benefit at the end of the policy year; DDB1 is the employee’s deemed death benefit at the end of the preceding policy year; and X is the premium for one dollar of paid-up whole life insurance at the employee’s attained age at the beginning of the policy year.³