Group Life Insurance Buyer’s Guide for Employers

Group life is the benefit employees think least about and value most at the moment it pays. It is also the line where employers most often carry a tax problem they do not know about, because the rules turn on a threshold that has not moved since 1964.

This guide covers how group term life is structured, the $50,000 rule and what it does to payroll, the difference between basic and supplemental coverage, and what happens to the benefit when someone leaves.

Basic, Supplemental and Voluntary

Basic group term life is employer-paid and automatic. Everyone in the eligible class gets it without applying and usually without answering a single health question, because the carrier is pricing the group rather than the individual. The benefit is normally either a flat amount or a multiple of salary. Pay and benefits compete for the same budget, which is why a total rewards strategy looks at them together.

Supplemental life is employee-paid coverage on top of the basic amount, elected in increments and usually capped as a multiple of salary. Up to a stated guaranteed issue amount, no medical questions are asked at initial eligibility. Above it, the employee completes evidence of insurability and the carrier can decline.

Voluntary life sometimes describes a standalone employee-paid plan where there is no basic coverage at all. The distinction matters mainly for tax, which is covered below.

Spouse and child coverage is generally available alongside supplemental, at modest amounts and modest cost.

The $50,000 Rule

This is the part employers get wrong, and it reaches payroll rather than the benefits file.

Section 79 of the Internal Revenue Code excludes the cost of the first $50,000 of employer-provided group term life from an employee’s income. Coverage above that is not tax-free. The imputed cost of the excess must be added to the employee’s taxable income using the IRS premium table, and it is subject to Social Security and Medicare tax.

What gets imputed is not what you actually paid. It is a rate from the IRS table, based on the employee’s age, applied to the coverage above $50,000. A younger workforce produces very little imputed income; an older one produces noticeably more for the same benefit.

The trap worth naming: a plan of two times salary is perfectly ordinary, and any employee earning more than $25,000 is already over the threshold. Employers who set a salary multiple without thinking about Section 79 frequently discover years later that imputed income was never run.

When Employee-Paid Coverage Is Still “Employer-Carried”

A plan does not escape Section 79 just because employees pay for it. The policy counts as carried by the employer if either of two things is true: the employer pays any part of the cost, or the employer arranges the premiums and the rates are structured so that at least one employee subsidises another.

That second condition is the one that surprises people. It is known as the straddle rule, and it catches plans where the employer charges a single blended rate across all ages. If some employees are paying more than the IRS table rate for their age and others less, the plan is employer-carried even though the employer contributes nothing.

The practical answer is to charge age-banded rates that sit on one side of the table, or to accept the imputation and run it correctly. Either is fine. Not knowing which situation you are in is not.

Spouse and Dependent Coverage

Employer-paid life insurance on a spouse or dependent is not taxable to the employee as long as the face amount does not exceed $2,000, where it is treated as a de minimis fringe benefit. Above that, the whole amount becomes imputable, not just the excess — which is the opposite of how the $50,000 employee rule works, and is why $2,000 is such a common dependent-life amount.

AD&D, and Why It Is Not Life Insurance

Accidental death and dismemberment is usually bundled with group life and priced at almost nothing, which tells you how rarely it pays. It covers death by accident and the loss of specified body parts or functions, on a schedule.

It is a reasonable thing to include and a poor thing to lean on. Most deaths are not accidental, so an employer who describes the combined figure as the life benefit is overstating what the family will actually receive. Communicate the two amounts separately.

What Happens When Someone Leaves

Group life ends with employment, subject to whatever the certificate says about the final day. Two provisions soften that, and employees need to hear about both while they still have time to use them:

Conversion lets a departing employee convert group coverage to an individual permanent policy without medical questions, within a short window — often 31 days. The premium is usually high, because it is individual whole life priced at attained age. For someone who has become uninsurable, it can still be the only option available.

Portability, where the plan offers it, lets the employee keep term coverage at group-adjacent rates. It is cheaper than conversion and less commonly available.

Both have hard deadlines, and both are routinely missed because the notice goes out with the COBRA paperwork and is read as part of it. A plan that offers conversion and never tells anyone has, in practical terms, no conversion.

The Beneficiary Problem

The most common failure in group life has nothing to do with plan design. It is beneficiary designations that were completed once at hire and never touched again through a marriage, a divorce, a birth or a death.

The carrier pays the name on the form. It does not pay the person the employee would obviously have chosen, and it does not read the will. An annual reminder during open enrollment costs nothing and prevents the single worst outcome this benefit can produce.

Questions We Get

How much group life should we offer?

One to two times salary is the common range for basic employer-paid coverage, often with a flat-dollar alternative for hourly populations. The more useful question is what the benefit is meant to do — cover final expenses, or replace income for a period — because those imply very different amounts. Supplemental coverage then lets employees who need more buy it themselves.

What is the $50,000 rule?

IRC Section 79 excludes the cost of the first $50,000 of employer-provided group term life from an employee’s taxable income. The imputed cost of coverage above $50,000 must be added to income using the IRS premium table and is subject to Social Security and Medicare tax. It is a payroll obligation, not a benefits one, and it is frequently missed.

We do not pay for the coverage. Does Section 79 still apply?

It can. The policy is treated as carried by the employer if the employer pays any part of the cost, or if the employer arranges the premiums and the rate structure means at least one employee subsidises another. That second test — the straddle rule — catches plans that charge a single blended rate across all ages, even with no employer contribution.

How is the imputed amount calculated?

Not from what you paid. The IRS publishes a table of monthly rates per $1,000 of coverage by age band, and the imputed income is that rate applied to the coverage above $50,000. An older workforce generates noticeably more imputed income than a younger one for an identical benefit.

Is spouse and child life insurance taxable?

Employer-paid coverage on a spouse or dependent is not taxable if the face amount does not exceed $2,000, treated as a de minimis fringe benefit. Above $2,000 the entire amount becomes imputable rather than just the excess, which is why $2,000 is such a common dependent-life face amount.

What is guaranteed issue?

The amount of coverage an employee can elect without answering medical questions, available at initial eligibility. Above it, the carrier requires evidence of insurability and may decline. Employees who skip supplemental life at hire and want it later usually face underwriting they could have avoided.

What happens to the coverage when an employee leaves?

It ends with employment. Most certificates offer conversion to an individual permanent policy without medical questions within a short window, often 31 days, at individual rates. Some plans also offer portability, which keeps term coverage at better rates. Both have hard deadlines and both are routinely missed because the notice arrives alongside COBRA paperwork.

Is AD&D the same as life insurance?

No. Accidental death and dismemberment pays only for death by accident or for specified losses on a schedule. Since most deaths are not accidental, quoting the combined life and AD&D figure as “the life benefit” overstates what a family is likely to receive. Communicate the two amounts separately.

How often should beneficiary designations be reviewed?

Annually, at open enrollment. The carrier pays the name on the form regardless of marriages, divorces, births or deaths since it was signed, and it does not defer to a will. This is the most common and most damaging failure in group life, and an annual reminder costs nothing.

General information for Michigan employers, not legal or tax advice. Plan-specific questions belong with your counsel or accountant, and we will bring them in.

Group Life Insurance: A Buyer’s Guide for Michigan Employers