8.3 Group Life Insurance

Group Life Insurance

Group life insurance covers many people under a single master contract issued to a sponsor — typically an employer, but also unions, associations, and creditors. Individual participants receive a certificate of insurance, not a policy. The employer/sponsor is the policyowner; employees are the insureds.

Group life is almost always term insurance (usually annually renewable term), so it builds no cash value. Its hallmark advantages are guaranteed coverage and low cost: because risk is spread across the group, most plans require little or no individual evidence of insurability up to a stated guaranteed-issue limit. Underwriting focuses on the group as a whole, not each member.

Eligibility and Anti-Selection Controls

To prevent adverse selection (only the unhealthy enrolling), group plans use structural safeguards:

• Eligible group: must be a real group formed for a purpose other than buying insurance (employer, labor union, trade association).
• Participation requirements: non-contributory (employer pays 100%) plans must enroll 100% of eligible employees; contributory plans (employees share cost) typically require at least 75% participation.
• Probationary period: a waiting period (e.g., 30–90 days) before a new hire becomes eligible.
• Eligibility period: an enrollment window (often 31 days) during which coverage is guaranteed-issue; enrolling later usually requires evidence of insurability.

Conversion and Continuation

When employment ends, the conversion privilege lets a departing employee convert group coverage to an individual whole life (not term) policy without evidence of insurability, generally within 31 days. Premiums are based on the insured's attained age at standard rates.

If the insured dies during the 31-day conversion period, the group death benefit is payable even if conversion was not yet completed. Group plans are not subject to a portability requirement the way COBRA applies to health coverage; conversion is the individual right that protects an uninsurable employee from losing coverage entirely.

Taxation of Group Life — The Section 79 $50,000 Rule

For employer-paid group term life, premiums are a deductible business expense to the employer and generally a tax-free benefit to the employee — but only up to $50,000 of coverage. Under IRC Section 79:

• Coverage up to $50,000: premium cost is not taxable to the employee.
• Coverage over $50,000: the cost of the excess (per the IRS Table I uniform-premium rates, by age) is imputed income added to the employee's W-2 wages.

The death benefit itself is always income-tax-free to the beneficiary regardless of amount; only the premium value on the excess coverage is taxed to the living employee.

Worked Example — Imputed Income

An employer provides $130,000 of group term life. The employee is age 45, and IRS Table I cost is $0.15 per $1,000 of excess coverage per month.

The employee reports $144 of imputed W-2 income for the year. Any premium the employee personally contributes reduces the imputed amount dollar-for-dollar.

Common Group Life Variants

Group life appears in several forms, each tested for its distinguishing feature:

• Group term life: the standard offering; annually renewable term, no cash value, employer-sponsored.
• Dependent group life: small face amounts covering a spouse and children, often a flat per-life amount and frequently capped by law.
• Group creditor life: covers the outstanding balance of a loan so the debt is retired at death; the creditor is the beneficiary, and the benefit decreases as the loan is repaid.
• Franchise (wholesale) insurance: individual policies issued to members of a group too small for true group underwriting, billed through the employer.

Why Group Costs Less and Who Bears Risk

Group term costs less than comparable individual coverage for three structural reasons: administrative savings from one master contract, mass marketing that eliminates per-policy commissions and individual underwriting, and experience rating that prices the group on its own claims history. Premiums are typically guaranteed for one year and adjusted at renewal based on the group's experience and changing demographics.

The employer-sponsor controls the master policy, chooses the benefit schedule (e.g., flat amount, multiple of salary, or by position class), and may change or terminate coverage. Employees cannot individually negotiate terms — they accept the certificate schedule. If the master policy terminates, the conversion privilege is the employee's safety net, allowing continuation as individual permanent coverage without new underwriting.

Underwriting the Group, Not the Person

Group underwriting evaluates the risk characteristics of the whole group — its size, industry, average age, gender mix, and prior claims experience — rather than each member's health. Larger groups get fuller experience rating; smaller groups are pooled with similar employers. This is why a 25-year-old and a 60-year-old colleague can receive the same guaranteed coverage with no medical exam, up to the guaranteed-issue limit.

Amounts above the guaranteed-issue limit, late enrollees, and certain high benefit elections still require evidence of insurability. The plan's benefit schedule must be set by an objective rule — flat amount, multiple of salary, or class — so the employer cannot hand-pick higher benefits for favored individuals, which would invite adverse selection and run afoul of nondiscrimination expectations.