Quick answer: Group term life insurance is a single master policy that covers all eligible employees under a group benefit plan. The employer pays premiums (fully deductible) and the first $50,000 of coverage per employee is tax-free. No medical exam is required for standard coverage amounts. Group term rates are often cheaper than individual policies, especially for employees with health issues, making it a cost-effective baseline benefit for any employer.
The $50,000 Tax-Free Rule and Imputed Income Above That
Under IRC Section 79, employers can provide up to $50,000 of group term life insurance to employees with no tax consequences to the employee. Coverage above $50,000 results in "imputed income" — the IRS calculates a taxable benefit using Table I rates based on the employee's age. For a 45-year-old with $200,000 of coverage: $150,000 of excess coverage × Table I rate of $0.15/month per $1,000 = $22.50/month in imputed income, or $270 in taxable income for the year. For most employees, this is a minor tax hit for a valuable benefit. For 2% S-corp shareholders, different rules apply — the full premium is treated as W-2 income regardless of coverage amount.
Structuring Group Term for Small Businesses
Most carriers require a minimum of 2 eligible employees for a group policy. The plan must cover at least 70% of non-key employees to avoid discrimination issues, or use an alternative test. Benefit amounts are typically set as a multiple of salary — 1x or 2x annual compensation — with minimums and maximums. Employees can usually elect additional "voluntary" coverage beyond the basic amount (subject to evidence of insurability). Coverage terminates when employment ends, though employees typically have 31 days to convert to an individual policy without a medical exam. As a business owner, group term can also be a baseline component of a broader employee benefits package that helps with recruitment and retention.
Limitations for Business Owners Personally
Group term is excellent for employees but limited as a wealth-building or estate planning tool for business owners. There's no cash value accumulation, no portability (the policy lapses when you leave), and coverage typically ends at retirement. For an owner's personal financial plan, group term is a starting point — not a complete solution. Most financially sophisticated business owners supplement group term with individual permanent life insurance (owned personally or by a trust) for estate planning, and key person or buy-sell funding insurance at the business level. Think of group term as your baseline coverage for the team, not your personal protection strategy.
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