What Is Group Term Life Insurance and How Does It Work?

Group term life insurance is a common employee benefit, providing a financial safety net for individuals and their families. Employers frequently offer this coverage as part of a comprehensive benefits package, recognizing its value in attracting and retaining talent. This insurance offers a death benefit to designated beneficiaries if the insured employee passes away while the policy is active. Understanding its structure and features is important for employees seeking to maximize their workplace benefits and ensure financial preparedness.

Understanding Group Term Life Insurance

Group term life insurance is a type of life insurance policy issued under a single contract covering multiple individuals, typically company employees. Employers often provide this benefit, holding the contract rather than individual employees. Unlike individual life insurance policies, which require separate applications and extensive medical underwriting, group term policies usually involve group underwriting. This means eligible employees are frequently covered without a medical exam or detailed health questionnaire, making it more accessible.

Cost-efficiency stems from pooling risk across a large group, allowing more favorable rates than individual policies. This affordability makes it a popular benefit, enabling many to obtain coverage they might not otherwise pursue. Its primary purpose is to provide financial protection to an employee’s beneficiaries, offering a lump sum payment if the employee dies while the policy is active. This benefit helps beneficiaries manage expenses and maintain financial stability.

Group term life insurance is prevalent in workplace benefits packages across industries. Many employers provide basic coverage at no cost, highlighting its commonality as a standard benefit. Beyond basic coverage, employees often have the option to purchase supplemental insurance for themselves, spouses, or dependents. This supplemental coverage allows for higher benefit amounts, offering additional financial security tailored to individual needs.

Key Characteristics of Group Term Coverage

Group term life insurance policies define coverage amounts in various ways, often based on annual salary. A common approach sets the death benefit as a multiple of earnings, such as one to three times base salary. Some plans provide a flat dollar amount of coverage for all eligible employees, regardless of salary or position. Benefit levels can also vary based on an employee’s role, with executives sometimes receiving higher coverage.

Employees covered by group term life insurance designate beneficiaries to receive the death benefit. This ensures the payout goes to the individuals or entities the employee intends to support. Enrollment for basic group coverage is often automatic for eligible employees, particularly when the employer covers the full premium. For supplemental coverage, employees usually enroll during initial employment or annual open enrollment periods.

Many group term policies include portability or conversion rights, allowing employees to continue coverage after leaving employment. Portability allows an employee to maintain existing term life coverage by paying premiums directly to the insurer, continuing group rates under a separate arrangement. Conversion rights enable an employee to change their group term policy into an individual whole life (permanent) insurance policy. This conversion typically does not require a medical exam, but individual policy premiums are generally higher than group rates. Employees usually have a limited timeframe, often 31 days after group coverage ends, to elect portability or conversion.

Premiums for group term life insurance are handled in several ways. Many employers pay the entire cost for basic coverage, making it a no-cost benefit for employees. Costs may be shared between employer and employee, or the employee may pay the full premium, especially for supplemental coverage. When employees contribute, payments are typically deducted from payroll.

Tax Implications of Group Term Life Insurance

Tax treatment of group term life insurance is governed by Internal Revenue Code Section 79. Under this provision, employer-provided group term life insurance coverage up to $50,000 is a tax-free benefit for the employee. Employees do not include this coverage’s value in their taxable income. The exclusion applies to insurance on the employee’s life.

If employer-provided group term life insurance exceeds $50,000, the excess coverage is considered “imputed income” and is taxable to the employee. This imputed income is a non-cash benefit the IRS treats as cash compensation. It is subject to federal income tax, and Social Security and Medicare taxes (FICA taxes).

Imputed income is calculated using the IRS Uniform Premium Table (Table I). This table provides a monthly cost per $1,000 of coverage, varying by employee age. To determine the taxable amount, coverage exceeding $50,000 is divided by $1,000 and multiplied by the corresponding Table I rate for the employee’s age. For example, if a 45-year-old has $100,000 in coverage, imputed income is calculated on the $50,000 excess using their age’s Table I rate. Any amount the employee pays toward the insurance cost reduces this taxable imputed income.

Employers report this imputed income on the employee’s Form W-2. The taxable value of excess coverage is included in Boxes 1, 3, and 5. It is also shown in Box 12 with Code C. While employees are taxed on imputed income, the death benefit paid to beneficiaries from a group term life insurance policy is generally received income tax-free.

For employers, premiums paid for group term life insurance are tax-deductible as an ordinary and necessary business expense. This deduction applies as long as the employer is not a direct or indirect beneficiary of the policy. An exception applies to employer-provided group term life insurance on a spouse or dependent; it is not taxable if coverage does not exceed $2,000, as it may be a de minimis fringe benefit.