What Is EE Life Insurance and How Does It Work?

Employee life insurance, often known as group life insurance, is a financial safety net typically offered as a workplace benefit. This coverage provides financial protection for an employee’s loved ones in the event of their passing, ensuring a lump sum payment is made to designated beneficiaries. It forms a component of an overall employee benefits package.

Understanding Employee Life Insurance

Employee life insurance is fundamentally a group policy, meaning an employer purchases a single policy that covers a collective group of employees. This structure often makes it more cost-effective than individual policies, as the risk is spread across many individuals. Unlike individual life insurance, which typically requires a medical examination and extensive health questionnaires, employee life insurance often streamlines the enrollment process with minimal or no medical underwriting. Coverage usually becomes effective upon meeting eligibility requirements, such as a certain number of hours worked or a specific employment status. This benefit is tied to employment, meaning coverage is generally active only while an individual remains employed by the offering company.

Types of Coverage Available

Within employee life insurance, two common types of coverage are offered: basic and supplemental. Basic life insurance is often employer-paid, serving as a standard benefit provided to eligible employees at no or low cost. The coverage amount for basic policies is frequently a set amount, such as $25,000, or a multiple of an employee’s annual salary, often one or two times their earnings.

Supplemental, or voluntary, life insurance allows employees to purchase additional coverage beyond the basic employer-provided amount. Employees typically pay the premiums for this extra coverage, often through payroll deductions. Supplemental coverage offers employees the flexibility to increase their total death benefit to better align with their personal financial needs, such as covering a mortgage or providing for dependents. This can enhance financial security, especially if the basic coverage is insufficient.

Important Considerations for Your Coverage

Beneficiaries

Properly designating beneficiaries ensures your death benefit is paid according to your wishes. A primary beneficiary is the first person or entity designated to receive the policy proceeds. A contingent beneficiary is a secondary recipient who receives the benefit if the primary beneficiary is no longer living or cannot be located. Review and update beneficiary designations after significant life events, such as marriage, divorce, or the birth of a child, to ensure they remain current.

Tax Implications

The first $50,000 of employer-provided group term life insurance coverage is generally excluded from an employee’s taxable income. If the employer-paid coverage exceeds $50,000, the value above this threshold is considered “imputed income” to the employee. This imputed income is subject to federal income tax and Social Security and Medicare taxes, and it will be reported on the employee’s Form W-2, typically in Box 12 with code “C.” The death benefit paid to beneficiaries from employee life insurance is generally received tax-free.

Leaving Your Job: Portability and Convertibility

Two concepts apply if you leave your job: portability and convertibility. Portability allows an employee to continue their group term life insurance coverage after leaving employment by paying premiums directly to the insurer. This option often maintains group rates, which can be more favorable than individual policy rates, especially for those with health conditions. Convertibility grants the right to convert the group life insurance into an individual permanent life insurance policy, such as whole life, without needing to provide proof of insurability or undergo a medical exam. While conversion often results in higher premiums than group coverage, it guarantees continued coverage regardless of health status. Employees typically have a limited timeframe, often 31 to 60 days, to elect either portability or convertibility after their employment ends.