When small business owners think about employee benefits, group health insurance dominates the conversation. That’s understandable — health coverage is the most valued benefit in nearly every employee survey. But group life insurance deserves far more attention than it typically gets. It’s one of the most affordable benefits an employer can offer, it carries enormous perceived value among employees with families, and setting it up is considerably simpler than most people expect. This guide covers everything a small business owner needs to know about group life insurance.
What Is Group Life Insurance?
Group life insurance is employer-sponsored term life insurance provided to employees as part of their benefits package. Unlike individual life insurance, group life insurance doesn’t require each employee to undergo medical underwriting for the base coverage amount — it’s offered on a guaranteed-issue basis, meaning employees can’t be denied coverage based on health status up to the guaranteed issue limit. The employer typically pays the premium (or at least a portion of it), and coverage is provided to all eligible employees during their employment.
The most common structure is group term life insurance, which provides a death benefit to an employee’s designated beneficiaries if the employee dies while covered. Unlike permanent life insurance products, group term life insurance has no cash value — it’s pure protection for a specified period (usually your employment). This simplicity is one reason group term life is so administratively easy to offer as an employer benefit.
According to the Bureau of Labor Statistics’ Employee Benefits Survey, approximately 57% of private industry workers had access to employer-provided life insurance in 2023. For small employers (those with fewer than 100 employees), that percentage drops to around 43%, meaning many small businesses are leaving a significant retention and recruitment advantage on the table by not offering this benefit.
How Much Coverage Is Typically Offered?
The most common employer-sponsored group life benefit is either a flat dollar amount or a multiple of the employee’s annual salary. Flat amounts are simpler administratively — everyone gets the same coverage regardless of their pay. Salary multiples are more equitable but require updating as salaries change. The most typical structures are:
- $10,000 flat — Basic, low-cost option often used as a starting point
- $50,000 flat — Common choice; also happens to be the maximum amount eligible for favorable tax treatment under IRS Section 79
- 1x annual salary — The most popular salary-multiple structure
- 2x annual salary — Common among more generous employers and in competitive hiring markets
Many employers offer a base amount of employer-paid life insurance and then give employees the option to purchase additional voluntary life coverage — for themselves, their spouse, and their children — at group rates through payroll deduction. This layered approach maximizes the value of the benefit without dramatically increasing employer cost.
The IRS Section 79 Rule: What Employers Need to Know
IRS Code Section 79 has an important implication for employer-paid group life insurance: the cost of coverage above $50,000 is treated as taxable income to the employee. Specifically, the IRS uses a table to calculate the “cost” of coverage above $50,000 based on the employee’s age, and that amount is added to the employee’s W-2 as imputed income, subject to income tax and FICA taxes.
For most employees, especially younger ones, the imputed income amount is modest — often just a few dollars per month. But for older, higher-paid employees with large salary-based benefits (e.g., a $200,000/year executive with 2x salary coverage would have $350,000 above the $50,000 threshold), the imputed income can be more significant. Employers offering high coverage multiples should make sure their payroll system handles Section 79 calculations correctly and that affected employees understand the tax treatment.
One practical implication: many employers set their basic life coverage at exactly $50,000 to maximize the benefit while keeping it entirely tax-free to employees. Any additional coverage employees want can be offered as voluntary employee-paid life insurance, which is also typically free of imputed income since employees are paying the premiums with after-tax dollars.
What Does Group Life Insurance Cost?
This is where most employers are pleasantly surprised. Group term life insurance is genuinely inexpensive, particularly for younger workforces. Carriers price group life coverage using the age distribution of your employee group, and rates are typically expressed as a cost per $1,000 of coverage per month.
As a rough benchmark: for a group of 15 employees with an average age of 38 and average salary of $55,000, a 1x salary benefit might cost the employer somewhere between $150 and $300 per month total — often less than $20 per employee per month. For a flat $50,000 benefit, the numbers are similar or lower. Rates vary by carrier, group size, industry, and age composition, so getting a formal quote from your broker is essential before budgeting.
Compared to health insurance premiums — which easily run $500-800+ per employee per month for employer-sponsored coverage — group life is almost negligible in cost. Yet in employee surveys, it consistently ranks as one of the most valued benefits. The return on investment for group life insurance, measured in terms of employee perception of total compensation versus actual employer cost, is arguably better than almost any other benefit you can offer.
Guaranteed Issue vs. Evidence of Insurability
One of the key advantages of group life insurance is guaranteed issue coverage for the base benefit amount. Guaranteed issue (GI) means that employees can enroll in the base coverage amount without answering any health questions or taking a medical exam. This is a significant benefit for employees who might not qualify for individual life insurance on the open market due to health conditions.
However, GI limits apply. When employees want coverage above the GI limit — typically when electing voluntary supplemental life insurance or choosing a higher coverage multiple than the guaranteed amount — they may be required to provide Evidence of Insurability (EOI). EOI typically involves answering a health questionnaire and, for larger amounts or higher-risk situations, potentially a medical exam. Employees who apply for EOI can be declined by the carrier based on their health history.
New employees typically must enroll during their initial eligibility period to receive GI coverage. If they miss this window and try to enroll later during an open enrollment period, they may be subject to EOI even for the base benefit amount. Making sure new employees understand this enrollment deadline is an important communication task for employers.
Portability and Conversion Options
A common employee question is: “What happens to my life insurance if I leave the company?” Group life insurance is not portable in the traditional sense — the coverage ends when employment ends. However, most group life policies include two options that departing employees should understand.
Portability allows a departing employee to continue their group term life coverage at group rates by paying the premiums themselves directly to the carrier. This is typically less expensive than purchasing an individual term policy on the open market, particularly if the employee has had any health changes since the group coverage was issued. Portability must be elected within a specific window (usually 31 days) after coverage ends.
Conversion allows a departing employee to convert their group term coverage to an individual permanent life insurance policy (typically whole life) without evidence of insurability. This is valuable for employees who are no longer insurable due to health conditions — they can convert regardless of their current health status. Conversion policies tend to be expensive and are not always the best financial product, but the guaranteed insurability is what matters for employees who have no other options.
Adding Voluntary Life Insurance for Employees
Most employers who offer basic group life insurance also offer supplemental or voluntary life insurance as an add-on. Employees pay the full premium for voluntary coverage, but they get the advantage of group rates — which are almost always lower than what they’d pay for an individual policy on the open market, particularly if they’re older or have health conditions.
Voluntary life is typically offered in multiples of salary or flat increments (e.g., $10,000 increments up to $500,000). Spousal and child life coverage can also be offered voluntarily. Many employees find that the GI limit for voluntary life — often 3-5x salary or a fixed amount like $200,000-$300,000 — is more than enough for their needs, and they can enroll without any medical questions during their initial eligibility period.
Frequently Asked Questions
Do I have to offer life insurance to all employees?
Group life insurance must be offered on a nondiscriminatory basis — you can’t offer it only to certain employees (like executives) while excluding others. However, you can create eligibility criteria based on objective factors like employment status (full-time vs. part-time), length of service, or hours worked per week. All employees who meet your eligibility criteria must be offered the same coverage.
What happens to life insurance for an employee who goes on leave?
Most group life plans allow coverage to continue during approved leaves of absence, including FMLA leave. The specifics depend on your policy — some require the employer to continue paying premiums during leave; others allow employees to pay premiums directly. Review your plan documents or ask your carrier about leave provisions when you set up the plan.
Can I offer different coverage amounts to different employee classes?
Yes, within limits. You can offer different coverage amounts to different classes of employees (e.g., executives get 2x salary, all others get 1x salary), but the class definitions must be based on legitimate employment factors — not age, health status, or other protected characteristics. This structure must also comply with nondiscrimination testing requirements.
Is employer-paid group life insurance deductible as a business expense?
Yes. Premiums paid by an employer for group term life insurance covering employees are generally deductible as an ordinary business expense, as long as the business is not the beneficiary of the policy. This makes group life insurance a tax-efficient way to provide additional employee compensation.
Adding group life insurance to your benefits package is one of the highest-value, lowest-cost decisions a small business owner can make. Garden State Benefits works with carriers across our 26-state service area to find group life solutions that fit your workforce and your budget. Call Paul Z Olah directly at 856-880-6340 to get a quote or just talk through what makes sense for your business.