What Is Group Term Life Insurance and How Does It Work?
Navigate employer-provided group term life insurance. Understand its fundamentals, financial considerations, and continuity options for your coverage.
Group term life insurance is a common workplace benefit that provides financial protection to employees and their beneficiaries. Offered by employers, it’s an accessible way for many to obtain life insurance coverage, often at a lower cost than policies purchased independently. It helps ensure an employee’s designated beneficiaries receive a death benefit if the insured passes away while covered.
Understanding Group Term Life Insurance
Group term life insurance provides coverage to multiple individuals under a single contract, most often through an employer. This type of insurance is characterized by its “term” nature, meaning it provides coverage for a specific period, frequently renewing on an annual basis. Unlike permanent life insurance, which builds cash value, group term life insurance focuses solely on providing a death benefit for a defined term.
A key distinction of group term life insurance from individual policies is that it often does not require a medical examination for basic coverage. This feature can make it easier for employees to obtain coverage, regardless of their health status. The cost-effectiveness of group term life insurance stems from the group rates that apply, which are typically more affordable than those for comparable individual coverage. The employer often pays all or a portion of the premiums for a certain amount of coverage, further reducing the financial burden on employees.
Key Features and Coverage Details
Group term life insurance plans often have specific eligibility criteria, such as requiring employees to be full-time or to have completed a certain tenure with the company. Once eligible, employees are usually automatically enrolled in a basic level of coverage. This basic coverage is typically provided at little to no cost to the employee, with the employer covering the premiums.
Beyond the basic, employer-paid coverage, many plans offer supplemental or voluntary group term life insurance. Employees can purchase this additional coverage to increase their death benefit, and sometimes extend coverage to a spouse or children. Premiums for supplemental coverage are typically paid by the employee through payroll deductions. Coverage amounts are commonly determined as a multiple of an employee’s annual salary, such as one to three times their base pay, or as a flat amount for all employees.
Tax Implications for Employees
A tax consideration for employees receiving group term life insurance involves the Internal Revenue Service (IRS) rule concerning coverage exceeding $50,000. Under Internal Revenue Code Section 79, the cost of group term life insurance coverage provided by an employer above $50,000 is considered taxable income to the employee. This value is referred to as “imputed income” and is subject to federal and state income taxes, as well as Social Security and Medicare taxes. The first $50,000 of employer-provided coverage remains tax-free.
Employers calculate this imputed income using a specific IRS Uniform Premium Table (often referred to as Table 1), which assigns a cost per $1,000 of coverage based on the employee’s age. The calculation involves determining the value of coverage over the $50,000 threshold and multiplying it by the applicable rate from the IRS table. This amount is then reported on the employee’s Form W-2.
What Happens When Employment Ends
When an employee’s employment ends, their group term life insurance coverage typically terminates as well, as it is tied to their employment status. However, many group policies include a “conversion privilege,” which allows the employee to convert their group coverage into an individual life insurance policy. This conversion can usually be done without the need for a medical examination or health questions, ensuring continued coverage even if the individual’s health has changed.
The converted individual policy is often a whole life policy, and its premiums will likely be higher than those paid under the group plan, reflecting the shift from group rates to individual rates and the type of policy. Employees typically have a limited timeframe, often 30 to 60 days from the date their group coverage ends, to exercise their conversion rights. Some policies may also offer limited portability options, allowing employees to continue their term coverage at group rates for a temporary period after leaving employment.