What Is Group Term Life Insurance and How Is It Taxed?

Group term life insurance is taxed under a simple rule with a sharp edge: the first $50,000 of employer-provided coverage is completely tax-free, and every dollar of coverage above that creates “imputed income” that shows up on your W-2. You don’t receive cash, but the IRS treats a slice of the coverage as extra pay, calculates its value from an age-based rate table, and adds it to your taxable wages. Because employers commonly set coverage at one or two times salary, many workers cross the $50,000 line without realizing it.¹

The $50,000 Exclusion

Under IRC §79, the cost of the first $50,000 of employer-provided group term life insurance is excluded from your gross income entirely. No federal income tax, no Social Security tax, no Medicare tax on that amount.¹

Once total coverage passes $50,000, the value of the excess becomes imputed income. Your employer adds it to Boxes 1, 3, and 5 of your W-2. It’s subject to Social Security and Medicare taxes. Federal income tax withholding on the amount is optional for the employer, but the income still has to be reported on your return.²

How Imputed Income Is Calculated

The IRS doesn’t use the premium your employer actually pays. It uses a Uniform Premium Table (Table I) with fixed monthly rates per $1,000 of coverage, broken into five-year age bands. These rates are generally lower than real-world premiums, which keeps the tax modest for younger workers.

The 2026 Table I rates per $1,000 of coverage per month:

Under 25: $0.05
25–29: $0.06
30–34: $0.08
35–39: $0.09
40–44: $0.10
45–49: $0.15
50–54: $0.23
55–59: $0.43
60–64: $0.66
65–69: $1.27
70 and older: $2.06

The math is straightforward. Take your total coverage, subtract $50,000, divide the remainder by 1,000 to get the number of units. Multiply by the monthly rate for your age bracket (your age as of December 31 of the tax year), then multiply by 12 for the annual figure.

Take a 42-year-old with $150,000 of coverage. That’s $100,000 of excess, or 100 units. The 40–44 rate is $0.10 per month. So 100 × $0.10 = $10 per month, or $120 per year in imputed income on the W-2.

The rates climb steeply with age. That same $100,000 of excess coverage costs a 55-year-old $516 a year and a 70-year-old $2,472. Older employees with large coverage sometimes choose to reduce their coverage to bring the tax back down.

If you pay for part of your coverage with after-tax dollars, those contributions reduce the imputed income. Your employer subtracts what you paid from the Table I amount and only reports the net figure.⁴

Supplemental Coverage You Buy Yourself

Optional or voluntary coverage you elect on top of your employer-paid amount still counts toward the $50,000 threshold if it’s carried through the same group policy, even though you’re paying the premium. So if your employer provides $40,000 of basic coverage and you buy $100,000 of supplemental coverage under the same plan, only $50,000 is excluded. The remaining $90,000 generates imputed income figured the same way as above, with any after-tax premiums you paid subtracted out.⁴

Coverage for a Spouse or Child

Employer-paid group term coverage on a dependent has its own rule. If the face amount is $2,000 or less, the whole cost is excluded as a de minimis fringe benefit. Nothing shows up on your W-2.⁴

If the dependent coverage exceeds $2,000, the cost of the excess is taxable to you, calculated with the same Table I rates based on your age bracket, and reported on your W-2 separately from your own coverage.

When Coverage Is Fully Tax-Free

IRC §79(b) removes the $50,000 cap entirely in three situations:

Coverage that continues after you leave the employer because of a disability is fully excluded from your income.¹
Coverage where the employer is the beneficiary, or where a qualifying charity is the sole beneficiary for the entire year, is excluded.
Coverage provided under a contract subject to the qualified plan rules of IRC §72(m)(3) is excluded.

The disability exception is the one most workers might encounter. If you become permanently disabled and your former employer continues your group term coverage, no imputed income applies, even if the coverage is well above $50,000.

Key Employees Can Lose the Exclusion

IRC §79(d) contains a nondiscrimination rule that can strip the $50,000 exclusion away from certain higher-paid people if the plan favors them. The rule targets “key employees,” defined under IRC §416(i)(1) as an officer earning above an indexed threshold ($235,000 for 2026)⁵, a 5% owner of the business, or a 1% owner with compensation over $150,000.

If the plan is found to discriminate in eligibility or benefits, key employees lose the $50,000 exclusion entirely. The full cost of their coverage becomes taxable, valued at the greater of the Table I rate or the actual insurance cost, whichever is higher.¹ Rank-and-file employees keep the exclusion regardless.

Taxes on the Death Benefit

The death benefit paid to your beneficiaries is generally received income-tax-free. That’s true no matter how large the coverage was and no matter how much imputed income you paid tax on while alive.⁶

One catch: if the insurer holds the proceeds and pays them out in installments, any interest earned on the held balance is taxable to the beneficiary. The principal stays tax-free; the interest is reported as income, typically on a Form 1099-INT.⁶

The estate tax picture is different from the income tax picture. Under IRC §2042, life insurance proceeds are included in the deceased’s gross estate if payable to the estate itself or if the deceased held any “incidents of ownership” at death.⁷ The right to name and change beneficiaries counts as an incident of ownership, and most group term policies leave that right with the employee. For most people this is academic because the federal estate tax exemption is over $13.6 million per person in 2025 (scheduled to drop significantly after 2025 under current law). For high-net-worth employees with large supplemental coverage, it’s worth raising with an estate planner.

Taxes After You Leave the Job

Group term coverage ends when your employment ends, though most policies give you a 31-day window to convert the group coverage into an individual whole life policy without a medical exam. That right is the real value if your health has changed. Miss the 31 days and the right disappears. The converted policy is priced at standard individual whole life rates for your current age, which will be much higher than the group rate.

Some plans also offer portability, which lets you continue the same term coverage by paying the premiums directly. Whether portability is available depends on the terms of the employer’s master policy.

Neither conversion nor portability qualifies for the §79 exclusion once you no longer work for the employer. You pay the full premium with after-tax dollars, and there is no imputed income calculation because the coverage is no longer employer-provided.

1
Office of the Law Revision Counsel. 26 USC 79 – Group-Term Life Insurance Purchased for Employees
2
Internal Revenue Service. Publication 15-B Employer’s Tax Guide to Fringe Benefits
3
Internal Revenue Service. Publication 15-B Employer’s Tax Guide to Fringe Benefits – Table 2-2
4
Internal Revenue Service. Group-Term Life Insurance
5
Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
6
Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
7
Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance