Overview: Group term life insurance has a specific federal tax structure under IRC Section 79 that applies to both premiums and death benefits.

Premiums Paid by Employees

Employee-paid premiums for group life insurance are not tax-deductible as personal expenses on the employee's federal return. However, if premiums are paid through a Section 125 cafeteria plan using pre-tax salary reductions, the premium amounts are excluded from the employee's taxable wages — an exclusion that functions like a deduction by reducing what appears as income on the W-2.

Employer-Paid Premiums and the $50,000 Threshold

Under IRC Section 79, employer-provided group term life insurance coverage is tax-free to the employee for the first $50,000 of coverage. No income, Social Security, or Medicare taxes apply to the cost of this basic coverage.

When employer-paid coverage exceeds $50,000, the cost of coverage above $50,000 becomes imputed income — taxable compensation that the employee must recognize even though no cash changes hands. The imputed income is calculated using IRS Table I rates (not the actual premium the employer pays) based on the employee's age bracket.

Calculation example: An employee covered by $150,000 of employer-paid group life insurance, aged 48:

Step	Calculation	Result
Excess coverage	$150,000 – $50,000	$100,000
Coverage units	$100,000 ÷ $1,000	100 units
Table I rate for age 45–49	$0.15/unit/month	—
Monthly imputed income	100 × $0.15	$15.00/month
Annual imputed income	$15.00 × 12	$180.00/year

This $180 is included in the employee's W-2 wages (Box 1, Box 3, Box 5) and identified separately in Box 12 with Code C. FICA taxes (Social Security and Medicare) are withheld on this amount. Federal income tax withholding is not required, but the amount is still reported as taxable income.

Death Benefits

Life insurance death benefits — individual or group — are received by the beneficiary free of federal income tax under IRC Section 101(a). A beneficiary does not report the death benefit as gross income. The major exception: if the beneficiary elects to receive the death benefit in installments rather than as a lump sum, the interest credited to the deferred balance is taxable as ordinary income. The principal death benefit itself remains tax-free even in installment arrangements.