Basic life insurance is a simple group policy, almost always offered through an employer, that pays your beneficiaries a fixed lump sum when you die. Coverage typically runs from $10,000 up to one or two times your annual salary, the premium is often paid entirely by the employer, and the death benefit is paid tax-free in most cases. About 59 percent of private-sector workers have access to employer-provided life insurance, which makes it the way most Americans get their first policy.1Bureau of Labor Statistics. Table 5 – Life Insurance Benefits: Access, Participation, and Take-Up Rates
What the Policy Pays
A basic policy provides a single death benefit paid to the people you name as beneficiaries. The payout is a flat dollar amount set when the policy is issued, and it stays the same for the life of the policy. If your employer provides $75,000 in basic coverage, your beneficiaries receive $75,000 whether you die from illness, an accident, or natural causes.
These policies are pure protection. Unlike whole life or universal life, they don’t build cash value, earn dividends, or work as an investment. You can’t borrow against them or cash them out. The trade-off is price: basic life insurance costs a fraction of permanent coverage, and employer-provided basic coverage is often free to the employee.
Coverage amounts are usually tied to salary. The most common formula is one times annual earnings, though some employers offer a flat benefit like $25,000 or $50,000.
How Employer Group Coverage Works
Most basic life insurance comes as a group benefit. The employer buys one policy covering all eligible employees, and the insurer issues a certificate of coverage to each person rather than an individual contract. You’re usually enrolled automatically or during an open enrollment window, often without answering health questions or taking a medical exam.
Many employers pay the entire premium. When employees do contribute, the cost is deducted from each paycheck. Group pricing keeps premiums low because the insurer spreads risk across many people. Access is heavily skewed toward full-time work: about 76 percent of full-time workers have access, compared to 15 percent of part-time staff.1Bureau of Labor Statistics. Table 5 – Life Insurance Benefits: Access, Participation, and Take-Up Rates
Coverage stays in effect as long as you remain employed. Once you leave, the coverage ends unless you take specific steps to keep it.
The $50,000 Tax Threshold Most Employees Miss
Federal law lets your employer provide up to $50,000 of group-term life insurance tax-free. If your coverage exceeds that amount, the cost of the excess coverage counts as taxable income on your W-2, even though you never see that money in your paycheck.2Office of the Law Revision Counsel. 26 USC 79 – Group-Term Life Insurance Purchased for Employees
The IRS calls this “imputed income.” Your employer calculates it using a table that assigns a monthly cost per $1,000 of coverage based on your age. Younger employees pay very little because the rates are low. A worker under 25 is charged just $0.05 per $1,000 of excess coverage per month. The rates climb steeply with age: a 62-year-old is charged $0.66 per $1,000 per month.3Internal Revenue Service. 2026 Publication 15-B – Employer’s Tax Guide to Fringe Benefits
A concrete example: if you’re 55 with $150,000 in employer-provided group coverage, the taxable portion is the cost of $100,000 in excess coverage. At $0.43 per $1,000 per month, that adds about $516 to your taxable income for the year. Imputed income is also subject to Social Security and Medicare taxes.4Internal Revenue Service. Group-Term Life Insurance
If your total employer-provided group coverage stays at $50,000 or below, none of this applies. There are no tax consequences at all.4Internal Revenue Service. Group-Term Life Insurance
Do Beneficiaries Pay Tax on the Payout?
Almost never. Life insurance proceeds paid because of the insured person’s death are excluded from gross income under federal law.5Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits Your beneficiaries receive the full death benefit without owing federal income tax on it, whether the payout is $25,000 or $500,000.
The one exception: if the insurer pays interest on the death benefit because of a delayed payout, that interest is taxable income for the beneficiary. The original benefit amount remains tax-free, but the interest portion has to be reported.6Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
Accidental Death and Dismemberment Riders
Many employer-provided basic policies include an accidental death and dismemberment (AD&D) rider, sometimes bundled at no extra cost. AD&D only pays out for deaths or serious injuries caused by accidents. Die in a car crash and the AD&D rider pays in addition to the base life insurance benefit. Die from cancer and only the base policy pays.
When AD&D is paired with a basic life policy and an accidental death triggers both, your beneficiaries receive the combined amount. This is sometimes called “double indemnity” because the total payout is effectively twice the face value. AD&D can also make partial payments for qualifying non-fatal injuries like the loss of a limb, eyesight, or paralysis, though the specifics vary by policy.
AD&D is not a substitute for life insurance. It covers a narrow range of events and pays nothing for deaths from illness, organ failure, or age-related causes.
Naming Beneficiaries
When you enroll, you designate one or more beneficiaries to receive the death benefit. Most policies let you split the payout by percentage. You might assign 70 percent to a spouse and 30 percent to an adult child. If you name multiple beneficiaries without specifying percentages, insurers typically divide the money equally.
Beneficiary designations override whatever your will says. If your will leaves everything to your current spouse but your policy still names an ex-spouse as beneficiary, the ex-spouse gets the life insurance money. Insurers follow the designation on file, period. This is one of the most common and preventable mistakes in estate planning, and it happens constantly after divorces and remarriages.
Name at least one contingent beneficiary too, meaning the person who receives the payout if your primary beneficiary dies before you. Without one, the death benefit may default to your estate, where it could face probate delays and creditor claims. Review your designations after any major life event: marriage, divorce, the birth of a child, or a beneficiary’s death.
Exclusions That Limit Payment
Every basic life policy has exclusions. These aren’t buried traps, but you need to know them.
The suicide exclusion is standard. If the insured person dies by suicide within the first one to two years after the policy takes effect, the insurer won’t pay the full death benefit and typically refunds the premiums paid instead. Most states set this period at two years; a few use one year. After the exclusion period ends, suicide is covered like any other cause of death.
The contestability period runs alongside it. During the first two years of coverage, the insurer can investigate the accuracy of your application. If you misrepresented something material, like a serious medical condition or tobacco use, the insurer can deny the claim or reduce the payout. After two years, the policy is generally considered incontestable regardless of application errors.
Other common exclusions include deaths resulting from illegal activity, acts of war, or participation in certain high-risk activities. The details vary, and employer-sponsored group plans sometimes have fewer exclusions than individual policies. Nearly every state also applies a “slayer rule,” which prevents a beneficiary who intentionally caused the insured person’s death from collecting the payout. Courts handle this as a civil matter and use a lower standard of proof than criminal courts, so a beneficiary can be barred from collecting even without a criminal conviction.
Is Basic Coverage Enough?
Basic life insurance is designed to cover immediate expenses after a death: funeral costs, a few months of bills, maybe some outstanding debt. For many families, especially those with young children, a mortgage, or a single primary earner, one or two times annual salary won’t replace the income the household depends on. Financial planners commonly recommend coverage of five to ten times your annual earnings.
Most employers that offer basic coverage also offer supplemental (sometimes called voluntary) life insurance. Supplemental policies let you buy additional coverage on top of the basic benefit, often in $10,000 increments or as a multiple of your salary, with the premium deducted from your paycheck. You may be able to enroll without a medical exam up to a certain amount during initial enrollment, though higher amounts typically require health underwriting.
If your employer doesn’t offer supplemental coverage, or if you want a policy that isn’t tied to your job, an individual term life policy is usually the most cost-effective option for healthy applicants. Shopping independently also lets you match the coverage amount and term length to your actual financial obligations.
What Happens When You Leave Your Job
Employer-provided coverage typically ends when your employment ends. If you quit, get laid off, or retire, you lose the policy. Two options exist to keep some form of coverage in place: portability and conversion.
Portability
Porting your coverage means taking your group term policy with you as an individual term policy. You keep the same type of coverage but pay the full premium yourself. Ported policies usually remain available until you reach age 70 or 80, depending on the insurer. Premiums are higher than what you paid inside a group, and they rise with age. Not every group policy includes a portability option, so check your plan documents.
Conversion
Converting means exchanging your group term coverage for a permanent individual policy, typically whole life or universal life. The critical advantage is that you don’t need to pass a medical exam or answer health questions. If your health has declined since you first enrolled, conversion protects your ability to keep life insurance when you’d otherwise be uninsurable or face very expensive premiums. The downside is cost: conversion policies are priced based on your current age, and permanent life insurance is inherently more expensive than term.
Both options come with strict deadlines, typically 31 to 60 days after your employment or coverage ends. Miss the window and you lose the right permanently. Don’t wait for HR to notify you. If you’re leaving a job and have any health concern that might make buying new coverage difficult, ask about conversion immediately.
Filing a Claim
Filing a life insurance claim is more straightforward than most people expect. A beneficiary, executor, or other representative contacts the insurer to report the death and request a claim form. For employer-sponsored policies, HR can usually tell you which insurer to contact and may help initiate the process.
The key document is a certified death certificate. You’ll need to submit at least one certified copy to the insurer along with a completed claim form and proof of your identity. Certified copies come from the local vital records office or the funeral home and typically cost $15 to $25 each. Order several, since other financial and legal matters will need them too.
Most straightforward claims are paid within 30 days of the insurer receiving complete documentation. State laws generally require insurers to settle claims within 30 to 60 days, and if they miss that window, they may owe interest on the delayed payment. Claims involving accidental death, deaths during the contestability period, or missing documentation take longer because the insurer has a legal right to investigate.
Beneficiaries usually have a choice about how to receive the money. A lump sum is the most common option and the simplest: the full benefit arrives at once, tax-free. Installment payments spread the benefit out over time, with the insurer holding the balance in an interest-bearing account; the original benefit stays tax-free, but any interest earned is taxable. For most basic life payouts in the $25,000 to $150,000 range, the lump sum is the practical choice.