5.3 Group Life Insurance and Conversion
Key Takeaways
- Group life is issued under one master contract; members receive certificates and coverage is usually annually renewable term.
- Underwriting evaluates the group, not individuals; contributory plans need ~75% participation and noncontributory plans need 100%.
- New hires can enroll without evidence of insurability only within the eligibility/open-enrollment window (often 31 days).
- The conversion privilege converts group term to an INDIVIDUAL PERMANENT policy, no evidence of insurability, at attained-age standard rates, within 31 days.
- Death during the 31-day conversion period triggers payment of the group death benefit even if no conversion application was filed.
Group life insurance covers many people under a single master contract issued to a sponsor — typically an employer, union, or association. Individuals receive a certificate of insurance as proof of coverage, not an individual policy.
How Group Differs from Individual
| Feature | Individual Life | Group Life |
|---|---|---|
| Contract | Individual policy | Master contract + certificates |
| Underwriting | Individual | The group as a whole |
| Premium basis | Age/health of one | Experience/composition of group |
| Cost | Higher per unit | Lower per unit |
| Coverage type | Any | Usually annually renewable term |
Most employer group life is annually renewable term (ART) — temporary, no cash value, renewed each year for the group.
Underwriting the Group, Not the Person
The insurer evaluates the group, not each member. Key safeguards against adverse selection:
- Eligibility based on employment, not health (the group must form for a reason other than buying insurance).
- A minimum participation requirement: typically 75% of eligible employees for contributory plans, and 100% for noncontributory plans.
- A defined eligible class (e.g., all full-time employees) so the employer cannot hand-pick only unhealthy lives.
Contributory vs. Noncontributory
| Plan type | Who pays | Participation required |
|---|---|---|
| Noncontributory | Employer pays 100% | 100% of eligible |
| Contributory | Employee shares cost | Usually 75% |
Group Underwriting Limits and Probationary Periods
Many group plans set coverage as a multiple of salary (e.g., 1× or 2× annual earnings) up to a guaranteed-issue maximum. Amounts above that maximum may require evidence of insurability.
- A probationary period (e.g., 30–90 days of employment) may apply before a new hire is eligible.
- An eligibility period (open enrollment window, often 31 days) lets a newly eligible employee enroll without proving insurability. Enrolling after it closes usually requires evidence of insurability.
Exam tip: No-evidence enrollment is available only within the eligibility period; latecomers face individual underwriting.
Conversion Privilege
When group coverage ends (the employee leaves or the group plan terminates), the insured generally has a conversion privilege:
- Convert to an individual permanent (whole life) policy — NOT term — without evidence of insurability.
- The conversion window is commonly 31 days after group coverage ends. During this period the person remains covered.
- The new individual premium is based on the insured's attained age and the insurer's standard rates (no substandard rating even if unhealthy).
Exam trap: Conversion is to an INDIVIDUAL PERMANENT policy at attained-age standard rates — you cannot convert group term to individual term.
Death During the Conversion Period
If the insured dies during the 31-day conversion period — even without having applied to convert — the group death benefit is payable. The conversion right exists precisely to bridge this gap.
Scenario: An employee is laid off on March 1; group coverage ends March 1, starting the 31-day window. She dies March 20 without applying to convert. The group plan pays the full death benefit, because death occurred within the conversion period.
Quick Recap of the Numbers
- Contributory participation: 75%; noncontributory: 100%.
- Eligibility/open-enrollment window: often 31 days.
- Conversion window: 31 days, to individual permanent coverage at attained-age standard rates.
Group Life Tax Treatment (IRC Section 79)
Employer-paid group term life gets a key tax break under IRC Section 79: the cost of the first $50,000 of coverage is tax-free to the employee.
- Coverage above $50,000 creates imputed income — the IRS Table I cost of the excess coverage is added to the employee's taxable W-2 wages.
- The employer's premium payments are generally tax-deductible as a business expense.
- Death proceeds remain income-tax-free to the beneficiary, just like individual life.
Worked example: An employee has $130,000 of employer-paid group term life. The first $50,000 is tax-free; the $80,000 excess is valued using Table I rates by age and reported as imputed income. The employee never receives cash, but owes income tax on that imputed amount.
Group Underwriting Practices and Plan Forms
Group insurers manage risk through plan-level rules rather than individual exams:
- Experience rating (large groups): premium reflects the group's actual claims history.
- Community/manual rating (small groups): premium follows standard tables for the class.
- A noncontributory plan automatically enrolls all eligible employees, eliminating selection by individuals.
Common Group Forms
| Group form | Sponsor | Typical use |
|---|---|---|
| Group term life | Employer | Core employee benefit |
| Group creditor life | Lender | Covers borrowers' debts |
| Association/trade group | Association | Members of a profession |
Trap: The master contract holder (employer) owns the policy; the employee owns only the certificate and the conversion right — not the policy itself.
An employee's group life coverage terminates when she leaves her job. Under the conversion privilege, she may convert to:
A contributory group life plan requires what minimum participation of eligible employees?