How Does Employer Life Insurance Work?
Navigate employer life insurance. Learn how this workplace benefit functions, from its coverage and management to tax implications and claiming benefits.
Employer-provided life insurance is a common workplace benefit designed to offer financial protection to employees’ beneficiaries. This type of coverage typically comes as part of an employee’s overall benefits package, providing a layer of security for dependents in the event of the employee’s passing. It serves as a valuable component of an employer’s offerings, aiming to support the financial well-being of its workforce and their families.
Understanding Employer Provided Life Insurance
Employer life insurance generally falls into two main categories: basic and supplemental coverage. Basic coverage is often provided by the employer at no cost or for a minimal premium. Employees are frequently automatically enrolled upon meeting eligibility requirements, such as full-time employment status. This foundational coverage typically offers a death benefit ranging from a flat amount, such as $25,000 or $50,000, or a multiple of the employee’s annual salary.
Supplemental, or voluntary, coverage allows employees to purchase additional protection beyond the basic amount, often through payroll deductions. This extra coverage is employee-paid and can significantly increase the total death benefit. While basic coverage usually does not require individual underwriting or medical exams due to its group nature, supplemental coverage, especially for higher amounts, might require employees to answer health questions or undergo some form of underwriting.
Employer life insurance policies are typically group policies, meaning a single contract covers a defined group of employees. This often leads to lower premiums compared to individual policies. Eligibility commonly depends on factors like employment status or a minimum number of hours worked per week.
Managing Your Employer Life Insurance
The enrollment process for employer-provided life insurance typically occurs during specific periods, such as new employee onboarding or annual open enrollment. During these times, employees can elect or adjust their coverage, including signing up for basic and any available voluntary plans. Qualifying life events, like marriage, the birth of a child, or a divorce, also often allow employees to make changes to their coverage outside of the standard open enrollment period.
Designating beneficiaries is an important step in managing employer life insurance, as it ensures the death benefit is paid to the intended individuals. Employees typically name beneficiaries through their employer’s HR department or directly with the insurance carrier. It is advisable to review and update beneficiary designations regularly, especially after major life events, to ensure the information remains current and reflects current wishes.
When an employee leaves their job, the employer-provided life insurance coverage typically ceases, but options like portability and convertibility may be available. Portability allows an employee to continue their group term life insurance coverage by paying premiums directly to the insurer, often at group rates, for a limited period after leaving employment. Convertibility allows a former employee to convert their group term life insurance into an individual whole life insurance policy without needing a medical examination. While converted policies are typically more expensive than the former group rates, they offer permanent coverage and are guaranteed issue. Employees generally have a limited window to apply for portability or conversion.
Taxation and Claiming Benefits
The tax treatment of employer-provided life insurance premiums involves specific rules. Under Internal Revenue Code Section 79, the cost of the first $50,000 of group-term life insurance coverage provided by an employer is generally excluded from an employee’s taxable income. However, if the employer-paid coverage exceeds $50,000, the cost of the coverage above that threshold is considered taxable income to the employee. This “imputed income” is calculated using IRS premium tables and is subject to Social Security and Medicare taxes, even if the employee does not directly receive the benefit.
In most situations, life insurance death benefits paid to beneficiaries are not subject to income tax. This means that the lump sum received by a beneficiary upon the insured’s death is typically tax-free.
Claiming life insurance benefits typically involves a straightforward process for beneficiaries. The first step is to contact the deceased’s employer’s human resources department or the insurance carrier directly to initiate the claim. Beneficiaries will generally need to complete a claim form provided by the insurance company and obtain a certified copy of the death certificate. Once all required paperwork is submitted, insurance companies typically process claims within a few weeks to a month.