Final answer:
You may exclude Group Term Life Insurance premiums on the first $50,000 of coverage paid for by your employer. Calculating the actuarially fair premium for life insurance requires considering the probability of a claim and the policy's benefit amount. Adequate insurance coverage, including health, pension, deposit, and workers' compensation insurance, is important for financial protection.
Step-by-step explanation:
The student's question pertains to the amount of Group Term Life Insurance (GTLI) premiums paid by an employer that an employee can exclude from taxable income.
According to IRS guidelines, an employee does not have to count the cost of up to $50,000 of group term life insurance coverage provided by an employer as taxable income.
However, the cost of employer-provided life insurance over that amount must be included in income, and it is subject to tax.
This tax provision is structured to encourage employers to provide some level of life insurance to their employees as a tax-free benefit.
In the scenario presented, the difference in premiums for people with different risk profiles is calculated to understand how a family history of cancer affects life insurance rates.
To calculate the actuarially fair premium for each group, one takes the probability of a claim occurring within the group multiplied by the amount of the benefit.
For an insurance company that does not distinguish between groups, blending the premium is inevitable but can lead to adverse selection if healthier individuals believe they are overpaying and decide not to purchase insurance. These concepts ensure that premiums are fair and reflective of the risk being insured.
Furthermore, the importance of adequate insurance is highlighted through the concept of being 'underinsured.' Where there are high healthcare costs, insurance should sufficiently cover an individual's needs to prevent significant out-of-pocket expenses that can strain personal finances.
The mention of pension insurance, deposit insurance, and workman's compensation insurance provides additional context on protections put in place by law for different life situations.