8.3 Group Life Insurance Underwriting and Conversion Rights
Key Takeaways
- Group life uses a master contract held by the employer; covered employees receive certificates, not individual policies.
- Noncontributory plans (employer pays all) require 100% participation; contributory plans typically require about 75% to control adverse selection.
- Under IRC Section 79, the first $50,000 of employer-paid group term is tax-free; coverage above $50,000 creates imputed income from IRS Table I.
- On termination, an employee has a conversion right (commonly 31 days) to an individual permanent policy without evidence of insurability, at the insurer's individual attained-age rate.
- Death during the 31-day conversion period is covered even if the employee never applied to convert.
Group Structure: Master Contract and Certificates
Group life insurance covers many people under one contract. The insurer issues a master contract to the group policyholder — usually the employer or an association. Each covered employee receives a certificate of insurance summarizing coverage; the certificate is not the policy.
| Element | Holder / role |
|---|---|
| Master contract | Employer (group policyholder) |
| Certificate | Each covered employee |
| Premium | Often shared employer/employee |
A valid group must exist for a purpose other than obtaining insurance — insurance is incidental to employment or membership. This rule, plus a steady flow of new members, keeps the risk pool fresh.
Group Underwriting: the Group, Not the Person
Group underwriting evaluates the characteristics of the group — size, industry, average age, turnover, plan design — rather than each individual's health. To prevent adverse selection, coverage amounts are set by a non-selective formula (a multiple of salary, a flat amount, or job class), so no employee can choose a high benefit because they expect to die.
Participation thresholds reinforce this:
| Plan type | Who pays | Minimum participation |
|---|---|---|
| Noncontributory | Employer pays 100% | 100% of eligible employees |
| Contributory | Employer + employee | Typically ~75% |
Why 100% for noncontributory? If it's free, anyone declining likely has a reason, so requiring everyone removes selection. Contributory plans accept ~75% because employees pay a share.
Experience rating then adjusts a large group's renewal premium up or down based on its actual claims, while small groups are community/manual rated because their experience lacks statistical credibility.
Eligibility, EOI, and Active Work
Employees become eligible after any waiting (probationary) period and must enroll during the initial enrollment window (often 31 days). Coverage up to the guaranteed issue limit needs no medical proof.
- Evidence of insurability (EOI) is required for amounts above the guaranteed-issue limit, for late enrollees, and for certain increases. Late enrollment triggers EOI precisely because a delay may signal adverse selection.
- Open enrollment is the annual window to add or change coverage without EOI up to limits; qualifying life events (marriage, birth/adoption) allow off-cycle changes.
- The actively-at-work rule postpones the start of coverage for an employee not working on the effective date — preventing coverage from attaching to someone already seriously ill.
Section 79 Tax Treatment of Group Term Life
Most employer group life is group term. Under IRC Section 79, employer-paid group term coverage is tax-free to the employee on the first $50,000. Coverage above $50,000 generates imputed income — a taxable amount computed from the IRS Uniform Premium (Table I) rate for the employee's age.
| Coverage | Tax treatment |
|---|---|
| First $50,000 (employer-paid) | Tax-free |
| Excess over $50,000 | Imputed income via Table I |
Worked example: An employee age 46 has $150,000 of employer-paid group term. Excess over $50,000 = $100,000 = 100 units of $1,000. The age 45–49 Table I rate is about $0.15 per $1,000 per month. Annual imputed income = 100 × $0.15 × 12 = $180, added to W-2 wages (reduced by any after-tax employee contribution).
Note: group variable life is a security — selling it requires a securities license (Series 6 or 7) and delivery of a prospectus.
Conversion Rights on Termination
The most heavily tested group-life feature is the conversion privilege. When an employee leaves the group (termination, retirement, or loss of eligibility), they may convert their group term coverage to an individual permanent (whole life) policy.
| Conversion rule | Detail |
|---|---|
| Time to apply | Commonly 31 days after coverage ends |
| Evidence of insurability | Not required |
| New premium | Insurer's individual attained-age rate (higher than group) |
| Policy type | Permanent (whole life), not term |
| Death during the 31-day window | Benefit payable even if no conversion application was filed |
The conversion right exists because an aging or now-uninsurable worker would otherwise lose all coverage. There is no health test, so the new individual premium is set at the person's current attained age. If the whole group plan terminates, conversion rights may be limited to employees with a minimum length of coverage and capped in amount.
Putting Numbers to a Conversion Scenario
Consider an employee, age 52, with $80,000 of group term who is laid off. During employment, the first $50,000 was tax-free and the $30,000 excess produced Table I imputed income (age 50–54 rate ~$0.23 per $1,000/month → 30 × $0.23 × 12 = $82.80 per year).
On layoff, she has 31 days to convert to an individual whole life policy with no medical exam, priced at her attained-age individual rate. If she dies on day 20 without yet applying, the group insurer still pays the death benefit because she was within the conversion window.
Trap: Conversion is to permanent insurance — an answer choice offering “convert to an individual term policy with no proof of insurability” is wrong on the product type.
Continuation vs. Conversion
Do not confuse conversion with continuation. Conversion ends the group tie and buys a new individual permanent policy. Continuation (often during a leave of absence or under a state continuation rule) keeps the same group coverage going for a limited time. Group life also has no federal COBRA right — COBRA applies to group health, not group life — so the conversion privilege is the departing worker's main protection for life coverage.
An employee age 46 has $250,000 of employer-paid group term life. Using a Table I rate of $0.15 per $1,000 of coverage per month, what is the annual imputed income (ignoring employee contributions)?
A terminated employee dies on day 18 of the 31-day group life conversion period without having applied to convert. What is the result?