What Is Basic Employee Life Insurance?

Basic employee life insurance is a common benefit provided by employers to their workforce. This type of coverage offers a financial safety net for employees’ designated beneficiaries in the event of their death. It is typically a group policy, and often forms a standard part of an overall employee benefits package.

Characteristics of Basic Employee Life Insurance

Basic employee life insurance is most frequently structured as group term life insurance. Unlike some other types of life insurance, group term policies typically do not accumulate cash value over time.

Coverage is often automatically provided upon employment, eliminating the need for extensive applications or medical examinations for the basic amount. Employers usually bear the full cost of this coverage, or it may be offered at a very low cost to the employee. Common coverage amounts are often set as a flat sum for all employees or as a multiple of the employee’s annual salary, such as one or two times their yearly pay. The insurance provides a death benefit to the employee’s chosen beneficiaries.

Receiving the Benefit

The process for receiving the death benefit begins with the employee designating beneficiaries for their policy. It is important for employees to keep this information current, especially after significant life events like marriage, divorce, or the birth of a child.

Upon the employee’s death while the coverage is active, the designated beneficiaries typically receive the death benefit as a lump sum payment. This payment can help beneficiaries manage immediate financial needs, such as funeral expenses, outstanding debts, or to help replace lost income. The insurance company processes the claim after receiving notification and necessary documentation, ensuring the funds are distributed according to the employee’s wishes.

Tax Treatment

The tax implications of basic employee life insurance affect both the employee and the beneficiaries. For the employee, the Internal Revenue Service (IRS) generally allows an exclusion for the first $50,000 of employer-provided group term life insurance coverage. If the coverage amount exceeds $50,000, the value of the coverage above this threshold is considered “imputed income” to the employee.

This imputed income is taxable and appears on their Form W-2. The calculation of this imputed income is based on an IRS Premium Table, which considers the employee’s age. Despite being considered taxable income to the employee, the death benefit received by the beneficiaries is generally income tax-free.

What Happens When Employment Ends

When an individual’s employment ends, their basic employee life insurance coverage typically ceases. However, many group policies offer options to continue coverage, primarily through “portability” or “conversion.” Portability allows an employee to continue their group term life insurance coverage directly with the insurer after leaving their job, often at group rates, by paying the premiums themselves. This option maintains the existing group policy’s structure for a limited period.

Conversion, on the other hand, grants the employee the right to convert their group term policy into an individual permanent life insurance policy. This conversion usually does not require a medical examination. While conversion provides lifelong coverage, the premiums for individual policies are generally higher than those for group coverage. The availability of portability and conversion options, along with their specific terms and conditions, varies by policy and insurer.