Many employers offer a range of benefits to their employees. The value of fringe benefits are considered taxable benefits and are included as income on your paycheque. This begs the question: Are fringe benefits really a benefit? It is possible to get the same benefits yourself for less?
You need to know your marginal tax rate, how much benefits will cost you and then consider other factors that may affect your outcome.
Group Life Insurance Premiums
Group life insurance premiums are based on an average premium for the group. This means that younger employees will pay a higher premium than an older employee.
A 35 year old male earning $75,000 will have a marginal tax rate of 35%. To obtain $600,000 of life insurance coverage, he can expect to pay around $600 per year for a 20-year term policy or $700 a year for the same group insurance.
Evaluating The After tax Consequences
While it looks like the group policy is more expensive, remember that the employer pays the premium and the employee only pays income tax on the value of the premium. Therefore, the employee only pays $245 a year for the group life insurance.
From a cost perspective, group life is a much better deal. However, you should be aware that there are some limitations to group life insurance. Two main issues with group life insurance are that the insurance may stop if you lose or change jobs (you may be able to convert the policy) and the terms of the plans often change without notice.
Side Note: Medical & Dental Benefits
Medical and dental benefits are far more lucrative because these are not considered a taxable benefit. If your employer offers these benefits, there is not tax to pay on their value!
Note that if you pay your all of your own medical and dental premiums or a portion, you may be able to use these premiums towards the medical expense tax credit.
Final Thoughts
Everyone’s situation is different and the after tax cost of premiums will vary depending on your marginal tax rate, age and health. Also, many of the rates available from on-line life insurance quote tools are the top rates. Often you will get a much lower tax rate by speaking with the insurance agent.
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