Group Life Insurance at Work: How It Is Taxed, Where It Stops, and What Happens When You Leave

Your pay slip may show a line for life insurance you never applied for. The employer chose the plan, the insurer issued it, and the coverage started on your first day or after a short waiting period. It feels like something you were given.

In tax terms, part of it is something you are paid. When an employer pays the premium for group term life insurance, the Canada Revenue Agency treats that premium as a taxable benefit, and Quebec adds a few rules of its own. That surprises many people the first time they look closely at a T4 or a Relevé 1.

Whatever the amount on your slips, the real question is not the tax. It is what the coverage does, where it stops, and what happens to it on the day you leave.

This page explains how group life insurance at work is taxed in Canada and in Quebec, what it does well, its limits, and the choices you face when you change jobs or retire. It is general information from a licensed insurance professional. It is not tax or legal advice, and it quotes no plan's premium or rate. The only figures in it are round illustrative assumptions, labelled as such.

Here is how the coverage is built.

What is group life insurance at work?

It is life insurance that an employer, a union or an association arranges for its members under one master contract with an insurer. You are covered because you belong to the group. You do not own the contract, and the terms are set between the employer and the insurer.

Most workplace life coverage is group term life insurance. It pays a death benefit if you die while covered, and it has no cash value. The amount is set by the plan's formula, which you will find in your benefits booklet. You usually name a beneficiary on a form the plan keeps, and the plan pays the person on file.

The Canada Revenue Agency describes a group term life insurance policy as one where the only amounts the insurer pays are policy dividends, experience rating refunds and amounts payable on death or disability. That definition matters for tax, as the next section shows. It also tells you what the coverage is not: it is not a savings vehicle and it does not build anything you can take with you.

Is the coverage really free?

Not quite. The premium is paid by your employer, but the Canada Revenue Agency treats it as a taxable benefit to you. Its page on premiums and contributions to insurance plans sets out the calculation for group term life when premiums are paid regularly and the rate does not depend on age or gender:

• the premiums payable for term life insurance on your life;
• plus the sales taxes and excise taxes on those premiums, not counting GST or HST;
• plus any provincial insurance levies or sales tax on premiums that your employer pays, which the page lists as 8% for Ontario, 7% for Manitoba and 9% for Quebec;
• minus the premiums and taxes you paid yourself, directly or by reimbursing your employer.

The amount is added to your employment income for the pay periods in which you received the benefit. It counts as pensionable earnings for the Canada Pension Plan or the Quebec Pension Plan. For a benefit that is not paid in cash, employment insurance premiums are not withheld on it.

The benefit can follow you past your last day of work. After employment ends, the Canada Revenue Agency asks the former employer or plan to report group term life benefits on a T4A under code 119. For a former employee, that reporting applies regardless of the amount. For a retiree whose only reported income is this amount, it applies when the amount exceeds $50 in the calendar year.

What changes in Quebec?

Two things. The first is the 9% tax on the premium. Quebec applies a tax to insurance premiums, and when your employer pays it on your group life coverage, it becomes part of your taxable benefit, as the federal calculation above shows.

The second is the scope of the benefit for Quebec income tax. Revenu Québec's page on group insurance plans with an insurance contract states that the taxable benefit for the coverage is the total premium, including the 9% tax, paid for your coverage, less what you reimbursed and less the dividends, refunds and premium rebates that relate to it. Its examples of coverage include medical, hospital and dental expenses.

That is a real difference from the federal rules. The Canada Revenue Agency states that employer contributions to a private health services plan that meets its conditions are not a taxable benefit. In Quebec, the employer's share of health and dental coverage is counted for Quebec income tax. So a Quebec employee may see a taxable benefit on the Relevé 1 that is larger than the one on the T4, because it includes health coverage as well as life coverage.

None of this changes whether the coverage is worth having. It explains a line on your tax slips that many people never notice.

What does that cost you, in practice?

It depends on two numbers you can find: the premium your employer pays for your coverage, and your own marginal tax rate. A worked example shows the arithmetic.

Illustrative example. Assume your employer pays a group term life premium of $300 a year on your coverage, and assume your combined marginal tax rate is 40%. Both figures are round numbers chosen for the arithmetic. They are not any plan's premium and not anyone's tax rate.

In this example, about $131 a year is what the coverage costs you in tax. Whether that is good value depends on the amount of coverage it buys and on what equivalent individual coverage would cost you at your age and health. The point of the example is not the number. It is that "free" coverage has a cost, and that the cost is small compared with the coverage only if the coverage is the right size.

What if you pay for part of the coverage yourself?

Many plans offer more than the basic amount. The employer pays for a base level of coverage, and you can choose additional, often called optional, coverage that you pay for through payroll. The terms, the maximum and any conditions for the extra amount are in your booklet.

The tax treatment follows the money. In the Canada Revenue Agency's calculation, the premiums and taxes you pay yourself, directly or by reimbursing your employer, are subtracted from the benefit. So coverage you pay for entirely yourself adds nothing to your taxable benefit, and coverage your employer pays for adds its premium and the provincial tax on it.

Optional coverage has the same limit as the basic coverage: it belongs to the plan. It can be a convenient way to add protection while you are employed. It is not a substitute for coverage you own, because it usually ends or changes when the job does.

What does group coverage do well?

It covers you without asking you to do much. Coverage usually starts with your employment, the premium is handled through payroll, and the death benefit is paid to your beneficiary if you die while covered. For a young family with a mortgage and little else in place, that can be the difference between a hard year and a crisis.

It is also simple to understand. There is usually no cash value, no dividend and no loan provision to manage. The plan's booklet states the amount, the beneficiary form names the person, and the plan pays.

And it is a reminder worth taking seriously. The Financial Consumer Agency of Canada suggests looking at what coverage you may already have through your employer when you think about life insurance. That is a sensible first step. It is the step before deciding whether that coverage does everything your family needs.

What happens when you leave or retire?

Read the booklet before your last day, not after. Many group plans include a conversion privilege: the right to replace part of your group coverage with an individual policy without new medical evidence, if you apply within a set window.

A conversion guide from one Quebec insurer sets out terms that are typical of what to look for. If your coverage ends on or before your 65th birthday, you have 31 days following your last day at work to exercise the privilege. Conversion is available without evidence of insurability. You may convert only part of your group coverage, subject to a minimum amount. The individual policy can be term life insurance to 65, permanent life insurance, or one-year term life insurance that can itself be converted. Your own plan may differ, and only its booklet and the insurer can confirm the terms.

Three points deserve attention.

• The window is short. Thirty-one days passes quickly in the middle of a job change or a retirement. Put the date in writing on the day you learn your coverage will end.
• The premium is yours now. A converted policy is an individual contract with an individual premium, based on your age at conversion. It can be much higher than the amount you saw on your pay slip, because you are no longer sharing the cost with a group.
• The choice of policy matters for decades. Converting to term life insurance buys time at a lower premium. Converting to permanent coverage costs more each year but does not expire at a set age. What each kind of coverage does is explained on term life insurance and on converting term or buying a new contract.

If your health is good, it is also worth asking whether a new individual policy, assessed on your health today, would cost less than the converted one. If your health is not good, the conversion privilege may be what lets you keep coverage at all, and the window becomes the most important date in the process.

Who will the plan actually pay?

The person named on the plan's beneficiary record, which is not always the person you would choose today. Group coverage is often set up on the first day of a job, when the form is one of many, and it is rarely looked at again. Marriages, separations, births and deaths happen in the years between.

The plan pays according to its records. Whether a will can change a designation depends on the province and on the wording used, so do not rely on a will to correct an out-of-date form. Three checks are worth making once a year, or after any change in the family:

• ask your employer's benefits contact who is named, and in what shares;
• name a contingent beneficiary, so the money has somewhere to go if the first person named has died; how that works is described on contingent beneficiary;
• if a child is named, ask what happens when a minor is entitled to a death benefit, because a minor cannot simply receive it. The issues are set out on a minor beneficiary and a beneficiary who cannot be found.

A beneficiary review takes ten minutes. It is the cheapest improvement most people can make to the coverage they already have.

Is group coverage at work enough for your family?

Begin with what the coverage would have to do, not with the amount in the booklet. Write down, on one page:

• who depends on your income, and for how many years;
• the debts that would remain, including the mortgage;
• what your household would need each year to keep going;
• any cost with a known date, such as children's education;
• what your spouse could earn, and what other coverage already exists.

Then compare that page with the group amount. If the group coverage covers most of it, you may need little more. If it covers a fraction, the gap is real, and it does not shrink because the coverage was free. How a household thinks through the money that follows a parent's death is set out on when a parent of young children dies.

Ask two more questions. What happens to this coverage if I change jobs in three years? And what would equivalent individual coverage cost me now, at my current age and health, compared with in ten years? Neither question needs an answer today. Both deserve one before the day the coverage ends.

How does individual coverage differ?

You own it. An individual policy is a contract between you and the insurer. It does not depend on your job, it continues when you change employers, and it ends only under its own terms. You choose the amount, the beneficiary and the kind of coverage.

You also pay for it, and you are assessed for it. The insurer considers your health, your history and sometimes your finances before it accepts the application. Some contracts include a right to buy more coverage later without new medical evidence, which can matter for a family whose needs are still growing; that feature is described on guaranteed insurability.

Individual coverage can be term life insurance, which covers a period, or permanent. One form of permanent coverage is a specially designed, high-cash-value, participating whole life insurance policy. It insures a life for the whole of that life and builds a cash value inside the contract, which can be reached through a policy loan from the insurer or a surrender. Its dividends are declared each year by the insurer's board and are not guaranteed, and its early years carry the heaviest costs. How such a contract works is set out on participating life insurance, and the wider section is whole life insurance.

Group coverage and individual coverage are not rivals. Many households keep both: the group coverage for as long as the job lasts, and an individual contract for the part of the need that must not depend on any employer.

What this page will not tell you

It will not tell you how much coverage your family needs, because that depends on your income, your debts, your dependants and your other resources. It will not quote any plan's premium or any insurer's conversion rate, because those belong to one plan on one date. And it will not tell you how your own taxable benefit is calculated on your slips, which is a question for your employer's payroll team or your accountant.

It will also not tell you to replace your group coverage. Workplace coverage is valuable while it lasts. The useful step is to know exactly what it does, and what it does not.

Who this does not suit

This page is less useful to someone whose employer coverage already matches the family's need and who expects to stay in the same plan until retirement. It also does not suit anyone looking for a quick rule, such as a multiple of salary to aim for, because no rule replaces a page of your own figures.

And individual permanent coverage does not suit everyone who reads this. If the premium would strain your budget in a hard year, or if nobody depends on your income, term life insurance or no additional coverage may be the honest answer. If the answer is no, that is a good outcome too.