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

The tax on employer-provided group term life insurance works off a single rule: the cost of the first $50,000 of coverage is tax-free, and the cost of anything above that becomes “imputed income” that shows up in your W-2 wages. The amount added isn’t the real premium your employer pays. It’s a figure the IRS calculates from a fixed rate table based on your age, and it’s subject to Social Security and Medicare tax whether or not your employer withholds federal income tax on it.¹²

The $50,000 Exclusion

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

The threshold applies to your total group term coverage carried by the employer, not to each policy separately. Any supplemental or voluntary coverage you buy through the same group plan counts toward the $50,000, even though you pay the premiums yourself. If your employer provides $40,000 of basic coverage and you elect $100,000 of optional coverage under the same plan, only $50,000 is excluded and the remaining $90,000 produces imputed income.³

How the Taxable Amount Is Calculated

The IRS ignores what the insurance actually costs your employer. Instead, it publishes a Uniform Premium Table (Table I) with monthly rates per $1,000 of coverage, grouped in five-year age brackets. These rates are set low, which keeps the tax modest for most employees.

The 2026 Table I rates are:

Under 25: $0.05 per $1,000 per month
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

⁴

Take your total coverage, subtract $50,000, and divide by 1,000 to get the number of taxable units. Multiply the units by the monthly rate for your age bracket (determined as of December 31 of the tax year), then multiply by 12 for the yearly figure.

A 42-year-old with $150,000 of group term coverage has $100,000 above the exclusion, or 100 units. At the 40–44 rate of $0.10 per month, that’s $10 a month, or $120 for the year. That $120 is what the employer adds to the W-2.

The rates climb steeply with age, and that changes the math for older employees. The same $100,000 of excess coverage produces $516 of annual imputed income for a 55-year-old and $2,472 for a 70-year-old. Some employees near retirement decide to cut back their coverage once they see what the bracket jump does to the yearly figure.

If you pay for part of your coverage with after-tax dollars, those payments reduce the imputed income dollar for dollar. Your employer subtracts what you paid from the Table I amount and reports only the net.³

What You’ll See on Your W-2 and Paycheck

The imputed income for coverage above $50,000 goes into Boxes 1, 3, and 5 of your W-2, so it raises your taxable wages, your Social Security wages, and your Medicare wages. Your employer must withhold Social Security and Medicare tax on it. Federal income tax withholding on the imputed amount is optional for the employer, which means some workers see it withheld through payroll and others owe the small additional income tax when they file.²

On a paycheck, imputed life insurance income often appears as a small addition to gross wages labeled something like “GTL” or “group term life,” matched by a corresponding deduction so it doesn’t inflate your take-home pay. The number is there so the payroll system can run FICA against it.

Dependent Coverage

Coverage on a spouse or child follows a separate rule. If the face amount is $2,000 or less per dependent, the entire cost is treated as a de minimis fringe benefit and excluded from your income. Once dependent coverage exceeds $2,000, the cost of the excess is taxable to you, calculated using the same Table I rates based on your age.³

Situations Where the Tax Doesn’t Apply

IRC §79(b) fully excludes group term coverage from income, with no $50,000 cap, in three cases:¹

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

The disability rule is the one most employees will ever run into. If your employer keeps your group term policy in force after you leave on disability, you don’t owe tax on it even if coverage is well above $50,000.

Key Employees Can Lose the Exclusion

If a group term plan discriminates in favor of “key employees,” those key employees lose the $50,000 exclusion entirely and their whole coverage cost becomes taxable. For that group, the taxable amount is the greater of Table I or the actual cost of the insurance, so a favorable group rate doesn’t help them.¹

Key employee is defined under IRC §416(i)(1) as an officer with compensation above an indexed threshold ($235,000 for 2026), a 5% owner, or a 1% owner earning more than $150,000.⁵ Rank-and-file employees keep the $50,000 exclusion regardless of whether the plan is discriminatory. The penalty falls only on the top tier.

Tax on the Death Benefit

The death benefit itself is generally received income-tax-free by the beneficiary, no matter how large the coverage was and regardless of any imputed income the employee paid tax on while alive.⁶

There is one common wrinkle. If the insurer holds the proceeds and pays them out over time, any interest earned on the held amount is taxable to the beneficiary and reported on Form 1099-INT. The principal stays tax-free; only the interest is income.⁶

Separately, the proceeds may be included in the deceased employee’s gross estate for federal estate tax purposes under IRC §2042 if the proceeds are payable to the estate or the employee held any incidents of ownership, such as the right to change beneficiaries.⁷ For most employees this is not a practical concern because of the size of the federal estate tax exemption, but the income tax exclusion on the death benefit is not the same thing as an estate tax exclusion.

After You Leave the Job

Group term coverage ends when employment ends. Most policies give you a 31-day window to convert to an individual whole life policy without a medical exam, and some plans also offer portability, which lets you keep the same term coverage by paying premiums yourself. Miss the 31-day window and the conversion right is gone.

Neither conversion nor portability qualifies for the §79 exclusion. Once you’re no longer an employee, you’re paying the premiums with after-tax dollars and there’s no imputed income calculation to worry about, 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. Group-Term Life Insurance
4
Internal Revenue Service. Publication 15-B Employer’s Tax Guide to Fringe Benefits – Table 2-2
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