According to the ACLI Life Insurers Fact Book, nearly 60% of private employers offered life insurance to employees in 2023, making it one of the more common workplace benefits. Offering this coverage to employees for free or at a discount is a great way to round out your benefits package.
What you’ll learn
What you’ll learn
Updated: July 24, 2025
Key takeaways
- Many companies offer their workers employer-sponsored life insurance. This benefit provides a lump sum payment to an employee’s beneficiaries in the event he or she dies while employed at the company.
- If you elect to offer life insurance to your employees, you need to be aware of coverage amounts, financial factors, and legal ramifications.
- Offering free or discounted life insurance coverage to employees can yield a variety of advantages. It can boost retention, reduce absenteeism, and generate tax benefits. However, group life insurance plans do not typically allow for much customization.
- Generally, the best way to manage a life insurance program and other employee benefits is via a benefits administration system.
This employer’s guide to company-sponsored life insurance outlines the types of life insurance you can offer your employees, provides insights on determining appropriate coverage levels, and explains how life insurance policies work.
Understanding employee life insurance
What is life insurance?
Life insurance is a financial product that pays a lump sum to designated beneficiaries when the insured person dies. When offered as an employee benefit, the employer typically pays all or part of the premium, providing workers with coverage at little to no cost. Generally, coverage amounts are linked to the employee’s salary or established as a set amount. Life insurance is a common benefit some employers offer to deliver peace of mind for employees and their families. It can be a valuable component of your full-time or part-time employee benefits packages.
Now that we better understand the basics of life insurance, let’s learn more about the core features of this benefit.
Types of life insurance
Generally, employers offer group life insurance to their employees, whereby the employer is the policyholder, not the individual employees. Moreover, benefits typically cease to exist when an employee, who is also referred to as an insured, is terminated.
- Most group life plans reflect term life insurance coverage, which provides a death benefit to an insured’s beneficiaries for a specified term (usually, employment). It has no value beyond that, which means the policyholder cannot cash out this type of policy.
- A less common type of life insurance offered by employers is permanent life insurance, which provides a death benefit to an insured’s beneficiaries for the lifetime of the insured. It also accumulates value, which means the policyholder can tap into the policy’s cash value.
Moving on, let’s explore the coverage terms and exclusions embedded in most life insurance policies.
Coverage and exclusions of life insurance for employees
If you are thinking about purchasing group life insurance for your employees, it is important to understand coverage terms and exclusions. Standards features are as follows:
- Standard coverages: A group life insurance benefit usually equates to an employee’s annual salary or a multiple of that amount. Other standard benefits include accidental death and dismemberment benefits, additional payouts in the wake of an accident, and repatriation benefits, which can cover the cost of transportation in the event an employee dies outside of their primary residence.
- Common exclusions: Generally, a life insurance policy is void under the following conditions: employee termination, pre-existing medical conditions, self-harm, and death due to risky activities, such as skydiving, rock climbing, and auto racing. Many contracts also exclude coverage as a result of death caused by substance abuse and illegal activity.
Factors influencing coverage amounts
When considering the coverage amounts to provide to employees, the decision is usually based on annual salary and employee level of influence.
- Annual salary: Many businesses offer a death benefit that is one to three times an employee’s base salary.
- Employee level: Some organizations offer higher coverage amounts to executives, senior leaders, and others with relatively high levels of influence within the organization.
Alternatively, many businesses offer the same flat dollar coverage to each eligible employee, making benefits administration straightforward.
In a recent survey, OnPay found that 19% of small businesses include life insurance in their perks programs — see graph below — and more data in the entire report.
Financial and legal considerations of providing life insurance through work
If you are thinking about incorporating life insurance into your business’s benefits package, the financial and legal considerations outlined below warrant consideration.
- The cost of offering life insurance: Maintaining a group life insurance plan is generally much less expensive than the cost of keeping up with a collection of individual policies. Generally, the cost is expressed on a per individual basis per $1,000 of coverage. The Federal Employees’ Group Life Insurance (FEGLI) Program breaks down a typical pricing framework in the attached program overview.
- Tax considerations: If your business offers an employee $50,000 or less of group life insurance, there are no tax implications for the employee. However, if your offering exceeds $50,000, the team member must report the excess as compensation to the IRS. From the employer perspective, premiums paid on behalf of employees are generally tax deductible, but business owners should consult with a tax accountant to ascertain things.
There’s obviously a number of things to consider before adopting a life insurance program for your employees. To help evaluate whether this benefit is sensible for your business, let’s take a focused look at the pros and cons.
Advantages of offering life insurance for employers
When you offer life insurance to your employees, you create instantaneous advantages for your business. The most prominent benefits are as follows:
- Increased employee retention and morale: Today, many employees say they would reduce their paychecks for better workplace benefits, and many have left their jobs to work somewhere with better benefits. A solid benefits program is one of the surest ways to increase loyalty, retention, and overall contentment. Happy and engaged employees exhibit greater productivity and more conscientious and profit-focused behavior than their less satisfied counterparts.
- Low cost and tax efficient: Given the nature of group life insurance, the cost of providing life insurance to employees is relatively modest. Moreover, in most cases, this expense is tax deductible.
- Reduced absenteeism and turnover: A robust benefits package that supports employees and their families can reduce employee absenteeism and turnover, thereby bolstering workplace productivity. As you work to establish the optimal benefits package, make sure you understand your workers’ wishlists.
Stress-free payroll and perks
“The value of the product and ease of use make it a no-brainer for small businesses. OnPay offers a lot of HR info and services; they do the tax filings, make adding employees and benefits simple, and have created a no-stress environment in doing payroll each week.”
— Barb Butler, Butler Landscapes
Potential drawbacks and challenges
The benefits of offering life insurance to employees are notable, but there are a few drawbacks to keep on your radar.
- Limited customization options: While individuals can pick and choose from various packages and offerings when buying personal life insurance, customization options are minimal with employer-sponsored plans. This is due to the fact that most employer-sponsored life insurance takes the form of a group plan, whereby the employer is the policyholder, not the individual employees..
- Dependency on employment status: Not every employee is likely to qualify for employee-sponsored life insurance, and you may need to add and remove individuals from your group policy as employment situations change. This can lead to additional administrative work.
As with any decision relating to employee benefits, you should weigh the pros and cons, do the math, and prudently determine if incorporating life insurance into your offering is a net positive for your organization.
Company life insurance is worth a closer look
Life insurance isn’t the easiest topic to discuss, but it’s an important benefit. It provides financial protection for employees’ families during their most difficult moments. Offering this benefit demonstrates genuine care for your workforce, while serving as a valuable recruitment and retention tool. For many workers, knowing their loved ones are protected provides peace of mind that translates into greater job satisfaction and loyalty.
If you’re ready to enhance your employee benefits offering, OnPay can help. From life insurance administration to health benefits administration to retirement planning, we provide comprehensive benefits solutions designed for small businesses.
Contact us today to discover how the right benefits package can strengthen your team, attract top talent, and keep everyone protected.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.