8.3 Group Life Insurance

Group Life Insurance

Group life insurance covers many people under a single master contract issued to a sponsor — usually an employer, union, or association. The sponsor is the policyowner; covered members receive a certificate of insurance summarizing their coverage, not an individual policy.

Core Mechanics

• Product: almost always annually renewable term (ART) with no cash value.
• Underwriting: the group is underwritten, not each person. Coverage up to a guaranteed issue limit requires no medical exam; amounts above it may require evidence of insurability.
• Coverage amounts: set by a nondiscriminatory formula (flat amount, multiple of salary, or by class) so individuals cannot self-select large benefits.
• Cost: experience-rated and far cheaper per $1,000 than individual coverage.

Eligibility and Participation

To prevent adverse selection, plans impose participation rules tied to who pays:

Eligible employees must usually be full-time and actively at work, and the plan may impose a probationary period (e.g., 30-90 days) before coverage begins, followed by an eligibility/enrollment period to join without proof of insurability.

Conversion Privilege

When a member leaves the group (termination, retirement, or the plan ends), the conversion privilege lets them convert their group term coverage to an individual permanent (whole life) policy without evidence of insurability.

• Conversion window: generally 31 days after coverage ends.
• Premium is based on the insured's attained age at standard rates.
• The amount converted generally cannot exceed the prior group coverage.
• During the 31-day window the person is still effectively covered (death benefit payable even if they have not yet converted).

Exam trap: conversion is to PERMANENT individual insurance, and no medical questions are asked. Continuing the group term is NOT the conversion right.

IRC Section 79: The $50,000 Rule

Employer-paid group term life is a tax-favored fringe benefit, but only up to a limit. Under IRC Section 79, the cost of the first $50,000 of employer-provided group term coverage is tax-free to the employee. The cost of coverage above $50,000 creates imputed income the employee must report, computed from the IRS Uniform Premium Table I monthly rate per $1,000 based on the employee's age.

Imputed Income (monthly) = (Total Coverage - $50,000) / $1,000 x Table I rate x 1
  (then subtract any after-tax premium the employee paid)

Worked Example: Section 79

A 47-year-old employee has $150,000 of fully employer-paid group term life. The Table I rate at age 45-49 is $0.15 per $1,000 per month.

• Coverage subject to tax: $150,000 - $50,000 = $100,000
• Units: $100,000 / $1,000 = 100
• Monthly imputed income: 100 x $0.15 = $15.00
• Annual imputed income: $15.00 x 12 = $180.00 added to W-2 wages

If the employee had paid part of the premium with after-tax dollars, that amount would reduce the imputed income.

Death Benefit and Dependent Coverage

The group life death benefit is income tax-free to the beneficiary, just like individual life. Plans may add small amounts of dependent coverage (often limited, e.g., a few thousand dollars on a spouse or child) which is generally permissible without separate underwriting.

Types of Group Sponsors

Not every collection of people qualifies as a group; the law requires a group that exists for a purpose other than obtaining insurance to prevent adverse selection.

• Employer-employee groups: the most common, often using a single-employer trust.
• Multiple-employer trusts (METs): small employers pool to obtain group rates.
• Labor union (Taft-Hartley) groups: the union is the sponsor.
• Association/professional groups: members of a bona fide association.
• Creditor-debtor groups: a lender insures borrowers; coverage equals the outstanding loan balance and the creditor is the beneficiary up to the debt.

Contributory vs. Noncontributory and Adverse Selection

The participation thresholds exist to defeat adverse selection — the tendency of less-healthy people to seek coverage while healthy ones decline. When the employer pays the entire premium (noncontributory), there is no reason for anyone to opt out, so 100% must be covered. When employees share the cost (contributory), some healthy workers may decline, so the insurer demands roughly 75% participation to keep the risk pool balanced. Late entrants who missed the enrollment window can be required to submit evidence of insurability before joining.

Conversion vs. Continuation and Coverage During Disability

Do not confuse the conversion privilege with portability or continuation. Conversion produces a brand-new individual permanent policy at attained age; it is the insured's contractual right, exercisable within the 31-day window, regardless of health. Some plans add a waiver-of-premium or continued coverage for a totally disabled employee. If the master contract terminates and the employee has been insured for a stated period, a limited conversion right may still apply.

The death benefit remaining payable during the 31-day conversion period is a frequently tested protection: if the former member dies before converting, the group insurer still pays.

Key Takeaways

• One master contract covers the group; members get certificates and the group is underwritten as a whole.
• Noncontributory plans need 100% participation; contributory plans typically about 75%.
• The 31-day conversion privilege allows conversion to individual permanent insurance with no evidence of insurability.
• IRC Section 79 makes the first $50,000 of employer-paid coverage tax-free; excess creates Table I imputed income.
• Group death benefits remain income tax-free to beneficiaries.