Life and disability
Group life and disability insurance for a small business
Figures on this page checked . Small group rates and rules reset every year — if you are reading this long after that date, call and we will tell you what moved.
What is basic group life insurance?
It’s term life insurance the company buys for every eligible employee, usually paid for entirely by the company. If an employee dies while covered, the plan pays their beneficiary either a flat amount the company chooses or a multiple of the employee’s salary.
Basic life almost always comes paired with accidental death and dismemberment (AD&D), which pays an additional amount if the death is accidental, and a share of it for the loss of a limb, sight or hearing in an accident.
Because every eligible employee is covered, carriers usually don’t ask health questions for the basic amount. That’s much of its value: an employee who couldn’t easily buy life insurance on their own has some through work.
In plain terms
Portability and conversion are what happen when someone leaves. Many group life plans let a departing employee keep some coverage by paying for it themselves, either by continuing a group policy or by converting to an individual one, if they act within a short window after leaving.
Is employer-paid group life insurance tax-free?
Up to $50,000 of coverage, yes. Under federal tax law (26 U.S.C. 79), employer-paid group term life insurance up to $50,000 isn’t income to the employee. The cost of coverage above it is, and it gets added to the employee’s taxable wages on their W-2 even though they never see the money.
The taxable amount isn’t what the company paid for the coverage. It comes from a table of rates by age that the IRS publishes, and your payroll provider works it out once it knows each person’s coverage amount. That’s why basic life is often set at $50,000: nobody gets an extra line on their W-2.
The rule is for group term life the company pays for. How it applies to owners of an S corporation or a partnership, and to coverage on a spouse or child, is a question for your accountant.
What is supplemental or voluntary life insurance?
It’s extra term life an employee buys for themselves, and often for a spouse and children, through payroll. The company sets it up; the employee pays for it.
- Group rates don’t depend on the employee’s health, and they usually rise in steps as the employee ages.
- Guaranteed issue means an employee can buy up to a set amount without health questions, usually only when first eligible. Asking for more, or joining later, means answering health questions and possibly being turned down.
- Spouse and child coverage is usually a smaller amount, tied to how much the employee buys.
Tell your employees about the guaranteed amount at their first enrollment. It’s the one time some of them will ever be able to buy life insurance without a medical exam.
What does short-term disability insurance replace?
Part of an employee’s weekly pay while an illness, injury or recovery from childbirth keeps them off work for weeks or a few months. It covers time off for reasons that have nothing to do with the job; an injury at work is a workers’ compensation claim instead.
Plans are built from three parts, and they typically look like this:
- A share of pay, typically a percentage of weekly earnings up to a weekly dollar maximum.
- An elimination period, the days an employee has to be out before benefits start. It’s typically shorter for an accident than for an illness.
- A benefit duration, the longest the plan will pay, typically counted in weeks and often timed so long-term disability can take over where it ends.
How does disability insurance fit with Colorado FAMLI?
They overlap, and Colorado law lets you line them up. FAMLI, Colorado’s paid family and medical leave program, already pays partial wages to an employee who can’t work because of their own serious health condition, and for other qualifying reasons like caring for a family member or bonding with a new child. So a Colorado employer choosing short-term disability is asking what a private plan adds on top of FAMLI, and whether that justifies its premium.
FAMLI is paid for by a premium on wages: 0.86% for 2027, down from 0.88% in 2026. An employer may take up to 50% of it from employees’ pay. An employer with fewer than 10 employees sends in only the employee half, may take it from pay, and pays no employer half.
The coordination question has an answer in the statute and the FAMLI Division’s rules (C.R.S. 8-13.3-510 and 7 CCR 1107-4.7): an employer may require FAMLI leave to run at the same time as a short-term disability policy, and count the FAMLI pay and weeks against what the policy still owes, if it tells employees in writing first.
Send the notice before anyone needs it
Coordinating FAMLI with a disability plan depends on telling your employees in writing first. Put it in the handbook or the enrollment packet when the plan starts, not in a letter to somebody already on leave.
What the law doesn’t settle is how the disability policy itself treats FAMLI pay: whether it pays its full benefit alongside or reduces its benefit by what FAMLI pays. That depends on the plan’s own terms, and a conversation sorts it out. It’s the first thing we read when we quote short-term disability for a Colorado company.
There’s one more route: an employer may apply to meet its FAMLI obligation through an approved private plan that gives at least the same rights and benefits. A company that does that runs its paid leave through the private plan instead of paying premiums to the state.
What does long-term disability insurance replace?
Part of an employee’s monthly pay when a disability lasts longer than short-term coverage or FAMLI can carry, for years if it has to. It’s the line that protects against the outcome people least expect and can least absorb.
- A share of pay, typically a percentage of monthly earnings up to a monthly maximum.
- A long elimination period, typically several months, which is why short-term disability or FAMLI is what bridges the start.
- A long benefit duration, often to retirement age for a disability that lasts.
- Offsets: the plan typically reduces its payment by other disability income, such as Social Security disability benefits.
- The definition of disability, which matters more than the percentage. Many plans pay at first if the employee can’t do their own job, then later only if they can’t do any job they’re reasonably suited for.
Who pays the premium, and whether it comes out of pay before or after tax, can decide whether the benefit is taxed when it pays out. That’s a choice to make with your accountant when the plan is set up, not after a claim.
How do these coverages compare?
Each one pays for a different loss. Here they are side by side.
| Question | What it pays for | Who usually pays | How it usually pays |
|---|---|---|---|
| Basic life | An employee’s death | The company | A flat amount or a multiple of salary, to a beneficiary |
| AD&D | Accidental death, or the loss of a limb, sight or hearing | The company, paired with basic life | An added lump sum |
| Supplemental life | More coverage for the employee and family | The employee | An amount the employee chooses |
| Short-term disability | Weeks off work for illness, injury or childbirth | Either | A share of weekly pay after a short wait |
| Long-term disability | A disability lasting months or years | Either | A share of monthly pay after a long wait |
General patterns across carriers. Amounts, waiting periods and benefit lengths are set in each plan and differ by carrier and by what the company chooses.
Why would a small company add life and disability?
Because they cost a fraction of a health plan and they answer a question people ask when they compare offers: what happens to my family, or my rent, if something happens to me. Employer-paid basic life for a small team is often one of the least expensive benefits a company can buy.
They also set a small company apart, because most people who work for a small company can’t get them through work. In the Bureau of Labor Statistics’ March 2026 survey of employee benefits, workers at private workplaces with fewer than 50 people had access to these through work at far lower rates than private workers overall:
- Life insurance: 40%, against 59% overall.
- Short-term disability: 30%, against 44%.
- Long-term disability: 22%, against 37%.
Most carriers that write group life and disability will quote a company with only a couple of enrolled employees when the company pays for the plan; voluntary plans usually need more people enrolled. A quote needs dates of birth, salaries and job titles, and never health information.
What are accident, critical illness and hospital plans?
They’re voluntary plans employees buy through payroll that pay cash when something specific happens, whatever the medical bill was. They add to a health plan and never replace one.
- Accident pays set amounts for covered injuries and treatment, like an emergency room visit or a broken bone.
- Critical illness pays a lump sum on a covered diagnosis, such as a heart attack, stroke or cancer.
- Hospital indemnity pays a set amount for a hospital admission and for each day in the hospital.
They’re most useful beside a high-deductible health plan, where a cash payment helps with the deductible. They cost the company little. Read the list of covered events before you offer one, because the plan only pays for what’s on it.
Questions owners ask about life and disability
Is group life insurance a taxable benefit?
Not up to $50,000 of employer-paid group term life coverage. Above that amount, the cost of the extra coverage, figured from an IRS table of rates by age rather than from what the company paid, is added to the employee's taxable wages on their W-2.
Your payroll provider works out the amount once it knows each person's coverage. Your accountant can confirm how the rule applies to owners.
We pay into FAMLI. Do we still need short-term disability?
Not necessarily. FAMLI already pays partial wages while an employee can't work because of their own serious health condition. A private short-term disability plan can add to it, and whether that justifies the premium depends on the plan and your people.
If you have both, Colorado law says an employer may require FAMLI leave to run at the same time as a short-term disability policy, and count the FAMLI pay and weeks against what the policy still owes, if it tells employees in writing first. How the policy itself treats FAMLI pay is in its own terms, and we read those before we recommend one.
We have three employees. Can we get group life and disability?
Usually, yes. Most carriers will write employer-paid group life and disability for a company with only a few enrolled employees. Plans the employees pay for themselves usually need more people enrolled. We check the rules against your headcount when we quote.
Will my employees have to answer health questions?
Usually not for employer-paid basic life and disability at standard amounts. For supplemental life above the guaranteed amount, or for someone who joins after their first chance to enroll, the carrier usually asks health questions and can decline.
What happens to an employee's life insurance when they leave?
The group coverage ends with the job, but many plans let the employee keep some of it by paying for it themselves, either by continuing the group coverage or by converting it to an individual policy. They usually have to ask within a short window after leaving, so tell them on their way out.
Should we offer accident and critical illness plans?
For some teams. They pay cash on a covered event and work best beside a high-deductible health plan. They cost the company little, since employees pay for them, but they only pay for the events they list, so read the list before you offer one.