8.3 Group Life Insurance

Characteristics of Group Life Insurance

Group life insurance covers many people under a single master contract issued to a group sponsor (usually an employer). Individuals receive a certificate of insurance, not a policy. The defining features the exam tests:

• The group sponsor (employer) is the policyowner; employees are the insureds.
• Coverage is typically annually renewable term — no cash value, lowest cost per dollar of protection.
• Underwriting is on the group as a whole, not the individual. Most plans require little or no evidence of insurability up to a guaranteed issue limit.
• The group must form for a purpose other than obtaining insurance (a true employment or association relationship) to prevent adverse selection.
• Premiums are lower than individual coverage because of economies of scale and reduced underwriting and acquisition cost.

Types of Group Life Plans and Their Tax Treatment

The Section 79 $50,000 Rule (Critical)

Under IRC Section 79, employer-paid group term life premiums are a tax-free benefit to employees only up to $50,000 of coverage. The cost of coverage above $50,000 is imputed income to the employee, taxed using the IRS Table I uniform premium rates (based on age). The employee pays income tax on this imputed amount even though no cash changes hands.

Worked example: An employer provides $130,000 of group term coverage. Coverage subject to imputed income = $130,000 − $50,000 = $80,000. The IRS Table I rate for the employee's age bracket is applied per $1,000 per month to that $80,000 to determine the taxable imputed income.

Eligibility, Enrollment, and Adverse Selection Controls

To qualify for tax advantages and control adverse selection, group plans use enrollment rules:

• Eligibility period (enrollment window): A new employee gets ~31 days to enroll without evidence of insurability.
• Noncontributory plans (employer pays 100%) require 100% participation — everyone is automatically covered, eliminating selection.
• Contributory plans (employees share cost) require at least 75% participation of eligible employees.
• An employee who declines during the eligibility period and later wants in must usually provide evidence of insurability.
• A probationary period (e.g., 30–90 days of employment) may apply before eligibility begins.

Continuation and Conversion

When an employee leaves, group coverage normally ends, but two protections apply:

• Conversion privilege: A terminating employee may convert group term coverage to an individual permanent (whole life) policy without evidence of insurability, typically within 31 days of termination. The premium is at the insured's attained age and standard rates — usually much higher than the group rate.
• If the employee dies during the 31-day conversion period, the group insurer pays the death benefit even if the conversion was not completed.
• Continuation: Some plans or state laws allow continued group coverage for a limited time; for group health, federal COBRA provides 18–36 months, but COBRA does not apply to group life.

Trap: Conversion is to an individual policy and does NOT require proof of good health, but the converted policy is permanent, not term, and is priced at attained age.

Federal Requirements and ERISA

Group life plans offered by private employers are governed by ERISA (the Employee Retirement Income Security Act), which imposes reporting, disclosure, and fiduciary duties. Key federal touchpoints the exam expects:

• Summary Plan Description (SPD): Employees must receive a plain-language SPD explaining benefits, eligibility, and claims procedures.
• Nondiscrimination: Plans cannot disproportionately favor key/highly-compensated employees; if they do, the favored employees lose the Section 79 $50,000 exclusion entirely.
• Age Discrimination in Employment Act (ADEA): Employers may reduce group life amounts for older workers only on a cost-justified basis.
• No COBRA for life: COBRA continuation applies to group health, not group life — group life uses the conversion privilege instead.

These federal layers sit on top of state insurance regulation, which still governs policy forms, the master contract, and the certificate of insurance.

Group Underwriting Factors and Premium Determination

Because the group, not the individual, is underwritten, insurers evaluate the characteristics of the group to set rates:

Experience rating adjusts a large group's premium based on its own claims history, while community (manual) rating pools small groups together using standard rate tables. Group term life carries no cash value, so the entire premium funds mortality and expense — making it the lowest-cost protection per dollar but offering no living benefit or equity to the insured. Because rates renew annually, an aging or shrinking group can see premiums climb over time, and a sponsor that terminates the master contract ends coverage for everyone at once, which is precisely why the conversion privilege exists as the individual's safety net.