What Is Employee Term Life Insurance?

Life insurance serves as a fundamental financial safeguard, providing a lump sum payment to beneficiaries upon the insured’s passing. Employers frequently offer this benefit as a way to enhance their compensation packages, contributing to the financial security of their workforce.

Understanding Employee Term Life Insurance

Employee term life insurance is a type of life insurance policy provided by an employer as part of an employee benefits package. This coverage is characterized by its “term” nature, meaning it remains in effect for a specific duration, typically while the individual is employed by the company.

This type of insurance is generally offered as a group policy, covering multiple employees under a single contract. Group policies often simplify the enrollment process, sometimes requiring minimal or no medical underwriting for basic coverage. Premiums for employee term life insurance can be structured in various ways; employers often cover the entire cost of basic coverage, or employees might pay a portion or the entire premium, especially for supplemental coverage.

Key Features and Characteristics

Employee term life insurance policies commonly link coverage amounts to an employee’s annual salary, often providing a benefit equal to one or two times their earnings. Some plans may offer a flat coverage amount for all eligible employees, such as a set amount like $50,000. Employees are typically required to designate beneficiaries who will receive the death benefit if a claim is made.

Enrollment in basic employee term life insurance is often straightforward, with many plans allowing automatic enrollment without requiring a medical examination. Beyond the basic coverage, employers may offer “supplemental” or “voluntary” coverage, allowing employees to purchase additional protection. This supplemental coverage typically involves employee-paid premiums and might offer higher coverage limits.

When employment ends, some group term life insurance policies include portability or convertibility options. Portability allows an employee to continue their term life coverage by paying premiums directly to the insurer, often for a limited period or until a certain age. Convertibility provides the option to convert the group term policy into an individual permanent life insurance policy, usually without new medical underwriting, though premiums for converted policies are typically higher.

Tax Implications

The tax treatment of employee term life insurance involves specific Internal Revenue Service (IRS) guidelines. Under IRS Code Section 79, employer-paid premiums for group term life insurance coverage up to $50,000 are generally not considered taxable income to the employee.

If an employer provides group term life insurance coverage exceeding $50,000, the cost of the coverage above this threshold is considered “imputed income” to the employee. This imputed income is taxable to the employee and must be included in their gross income for both federal income tax and FICA (Social Security and Medicare) purposes. Employers report this amount on the employee’s Form W-2, typically in Box 12 with Code C. While premiums for coverage over $50,000 are taxable to the employee, the death benefits paid to beneficiaries upon the insured’s death are typically received free of income tax.

Distinguishing from Other Life Insurance Options

Employee term life insurance differs significantly from individual life insurance policies, particularly in its structure and cost. As a group policy, it often provides coverage at a lower cost than an individual policy because the risk is spread across a large pool of employees. Individual term life insurance, purchased directly from an insurer, requires individual underwriting, which can involve medical exams and health questionnaires, potentially leading to higher premiums based on personal health and lifestyle factors.

Compared to permanent life insurance options, such as whole life or universal life insurance, employee term life insurance does not accumulate cash value. Permanent policies offer lifelong coverage and a savings component that can grow over time, allowing policyholders to borrow against or withdraw funds. Its primary purpose is to offer a death benefit for a specific term, without the investment or cash value features found in permanent life insurance.