8.3 Group Life Insurance

How Group Life Insurance Differs from Individual Coverage

Group life insurance covers many people under a single master contract issued to the sponsor — usually an employer, but also labor unions, trade associations, and creditor groups. The individuals covered receive a certificate of insurance, not a policy; the master policy belongs to the group sponsor. This structure drives most of the exam distinctions.

Key characteristics tested heavily:

• Group underwriting evaluates the group as a whole, not each individual. Within eligibility limits, most members receive coverage with little or no evidence of insurability.
• Coverage is almost always annually renewable term — pure protection with no cash value.
• The amount of coverage is set by a nondiscriminatory formula (e.g., a flat amount, a multiple of salary, or by class) so the employer cannot select against the insurer by giving more coverage only to healthy people.
• Premiums are typically experience-rated and far lower per $1,000 than individual coverage because of spread risk and lower acquisition cost.

To prevent adverse selection, the insurer requires a minimum participation percentage — commonly 75% of eligible employees for a contributory plan and 100% for a noncontributory (fully employer-paid) plan.

Adverse selection is the central risk the group structure is built to control. If only the employees who expect to die soon enrolled, claims would overwhelm premiums. Minimum participation, automatic enrollment in noncontributory plans, and benefit formulas tied to objective factors like salary all blunt that risk. This is why the producer must understand that group life is priced on the law of large numbers: the larger and more representative the group, the more predictable the mortality experience and the lower the rate per $1,000 of coverage.

Contributory vs. Noncontributory Plans

Whether employees pay part of the premium changes both participation rules and underwriting:

Because noncontributory plans automatically include everyone, they carry the least adverse-selection risk, which is why insurers demand 100% participation. The 75%/100% thresholds are frequently tested as a matched pair.

Contributory plans introduce one more wrinkle the exam tests: because employees choose whether to enroll and may apply for amounts above the guaranteed-issue limit, the insurer may require evidence of insurability for the excess coverage. The guaranteed-issue amount is the level granted with no medical questions; coverage above it triggers simplified or full underwriting.

Producers should explain that an employee who declines coverage at the first eligible date may be treated as a late enrollee and required to prove insurability to join later, a common reason an otherwise healthy worker is asked for a medical exam. The eligible-employee group is also defined by an actively-at-work requirement and a probationary waiting period, so coverage typically begins only after a new hire completes the eligibility period and is actively performing job duties on the effective date.

Conversion Privilege and Continuation

When employment ends, group coverage normally terminates. The conversion privilege lets a departing insured convert group coverage to an individual permanent (whole life) policy without evidence of insurability, provided application and first premium are made within the conversion period — typically 31 days after termination (the same window applies on the master policy's termination, sometimes with additional rules).

Important conversion rules:

• The converted policy must be a permanent plan, not term, and the premium is at the insured's attained age (higher than the group rate).
• The face amount may not exceed the group coverage being lost.
• If the insured dies during the 31-day conversion period, the group death benefit is payable even if conversion was never applied for — a classic exam trap.

Federal continuation rights under laws such as state mini-COBRA and certain ERISA provisions may extend group coverage temporarily, but conversion to an individual policy is the durable right tested most often.

Tax Treatment of Group Term Life (IRC Section 79)

Group term life has a special federal tax rule every producer must know. Under IRC Section 79:

• The employer may deduct premiums paid as a business expense.
• The employee receives the first $50,000 of employer-paid group term coverage income tax-free.
• For coverage above $50,000, the imputed cost of the excess (calculated using the IRS Table I rates by age) is added to the employee's taxable income (imputed income).

Worked Example: Imputed Income

An employer provides $130,000 of group term life. The employee is in an age band where Table I shows a cost of $0.10 per $1,000 per month.

The employee reports $96 of imputed income for the year. Trap: the first $50,000 is always excluded; only the excess generates imputed income. Any amount the employee pays toward the coverage with after-tax dollars reduces the imputed amount. As with all life insurance, the group death benefit itself remains income tax-free to the beneficiary.