5.3 Group Life Insurance and Conversion
Key Takeaways
- Group life is issued under one master policy; members receive certificates, and underwriting evaluates the whole group, so coverage is usually issued without individual evidence of insurability.
- Noncontributory plans require 100% participation; contributory plans typically require at least 75%.
- IRC Section 79 makes the first $50,000 of employer-paid group term tax-free; coverage above that is imputed income using IRS Table I rates.
- On termination, members may convert to an individual whole life policy without evidence of insurability, generally within 31 days.
- Death during the 31-day conversion period requires the group insurer to pay the benefit even if conversion was never applied for.
How Group Life Works
Group life insurance covers many people under a single master policy issued to an employer, association, or other sponsor. Individuals receive a certificate of insurance, not a policy. The group sponsor is the policyowner; the members are the insureds.
Most group life is annually renewable term, so it builds no cash value. Underwriting looks at the group as a whole, not each individual, which is why coverage is usually issued with little or no evidence of insurability.
Eligibility and the Nondiscrimination Rule
To qualify as a true group (and not an arrangement formed just to buy insurance), the group must exist for a purpose other than obtaining insurance and must enroll a sufficient share of members.
- Noncontributory plans (employer pays 100%): the insurer requires 100% participation of eligible employees, eliminating adverse selection.
- Contributory plans (employees pay part): typically at least 75% participation is required.
Group coverage cannot discriminate in favor of highly compensated key employees regarding eligibility or benefit formulas.
The Section 79 Tax Rule (Worked Numeric)
Under Internal Revenue Code Section 79, an employer may provide up to $50,000 of group term life tax-free to an employee. The cost of coverage above $50,000 is imputed income taxed to the employee using the IRS Table I monthly rates.
Example: Dana, age 45, has $150,000 of employer-paid group term life. The Table I rate at her age is $0.15 per $1,000 per month.
- Taxable excess = $150,000 − $50,000 = $100,000 (= 100 units of $1,000).
- Monthly imputed cost = 100 × $0.15 = $15.00.
- Annual imputed income added to Dana's W-2 = $15 × 12 = $180.
Conversion Privilege (Heavily Tested)
When group coverage ends — through termination of employment or loss of eligibility — the member usually has a conversion privilege: the right to convert to an individual whole life policy without evidence of insurability.
Key rules:
- Conversion is to a permanent/whole life plan, not term, and not the same group term.
- The member must apply and pay the first premium within the conversion period, commonly 31 days after coverage ends.
- Premiums are at the insurer's standard individual rate for the attained age — typically higher than the group rate.
- If the member dies during the 31-day conversion period, the group death benefit is paid even if conversion was never requested.
Group vs. Individual at a Glance
| Feature | Group Life | Individual Life |
|---|---|---|
| Document | Certificate | Policy |
| Underwriting | Whole group | Each applicant |
| Typical type | Annually renewable term | Term or permanent |
| Cash value | Usually none | Often (permanent) |
| Conversion | To individual whole life, no EOI | Not applicable |
EOI = evidence of insurability.
Types of Group Life Plans
Group life appears in several structures the exam expects you to recognize:
- Group term life — the dominant form; annually renewable term, no cash value, often a flat amount or a multiple of salary.
- Group permanent / group universal life — builds cash value; less common and more costly.
- Dependent group life — small face amounts on spouses and children, attached to the employee's certificate.
Benefit formulas must be nondiscriminatory — typically a uniform amount, a flat schedule, or a percentage of earnings that does not favor key employees.
Continuation Under Federal Law
Separate from conversion, some members may continue group coverage temporarily. While COBRA (the Consolidated Omnibus Budget Reconciliation Act) is best known for health plans, group life is generally not COBRA-eligible; instead, the conversion privilege is the member's primary route to keep life coverage.
Contrast the two on the exam: continuation keeps the same group coverage for a limited time; conversion moves the member to a new individual policy permanently. Group life relies on conversion, not continuation, after employment ends.
Scenario: Conversion Timing
Luis is laid off on March 1; his $80,000 group term certificate ends that day. He intends to convert but is hospitalized and dies March 20 without applying.
Because death occurred within the 31-day conversion period, the group insurer must pay the $80,000 death benefit even though Luis never submitted the conversion application. The conversion window protects the insured during the transition, a frequent exam scenario.
An employee terminates employment and wants to keep life coverage under the group plan's conversion privilege. The conversion is generally to what kind of policy, and within what period?
An employer provides $130,000 of group term life. Approximately how much of that coverage produces imputed income to the employee under IRC Section 79?