What Is a Group Term Life Insurance Policy?

Group term life insurance is a type of policy offered by an employer or organization to a group of individuals, most often its employees. It provides financial protection to designated beneficiaries if the insured dies during their employment. Employers often find this benefit to be a cost-effective way to provide security.

Key Characteristics of Group Term Life Insurance

Group term life insurance functions as a “term” policy, providing coverage for a specific duration, usually coinciding with employment. Unlike other life insurance types, it does not accumulate cash value or include investment components. The policy is issued to the employer or organization, covering all eligible employees or a defined class of employees.

Coverage amounts vary, often determined as a multiple of an employee’s salary, a flat amount, or based on job title. For standard coverage amounts, employees generally do not need a medical examination to qualify, which simplifies enrollment. Employers commonly pay all or a substantial portion of the premiums for basic coverage, making it an accessible benefit.

Taxation of Group Term Life Insurance

Internal Revenue Code Section 79 outlines the tax treatment of employer-provided group term life insurance. The cost of the first $50,000 of coverage is not considered taxable income to the employee. If coverage exceeds $50,000, the cost above this threshold is treated as “imputed income” to the employee. This imputed income is calculated using a uniform premium table provided by the IRS, and the amount is reported on the employee’s Form W-2.

For employers, premiums paid for group term life insurance are generally a deductible business expense. This deductibility applies as long as the plan meets specific IRS requirements, such as not disproportionately favoring highly compensated employees. When a death benefit is paid to beneficiaries, it is generally received free of income tax.

Employer and Employee Considerations

Employees typically become eligible for group term life insurance after meeting certain criteria, such as full-time employment status or completing a minimum service period with the company. Some policies may include “portability” options, allowing employees to continue their coverage after leaving the company, though they would usually assume the full premium cost. “Conversion” options might also be available, enabling employees to convert their group term policy into an individual whole life policy upon separation from employment, often without requiring medical underwriting.

Premiums can be structured in various ways; some plans are entirely employer-paid, while others are contributory, requiring employees to pay a portion. Employers offer this insurance as part of a competitive employee benefits package, aiming to attract and retain talent. Administering these plans involves managing enrollment, handling beneficiary designations, and fulfilling tax reporting requirements for employees.