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). Individuals receive a certificate of insurance, not a policy. The exam emphasizes who the parties are, how underwriting differs from individual coverage, the dominant product form, and the tax treatment of employer-paid premiums.

Structure and underwriting

The employer (or union, trust, or association) is the policyowner and holds the master policy; covered employees are insureds and receive certificates summarizing their coverage and conversion rights. Underwriting is group underwriting: the insurer evaluates the group as a whole — its size, demographics, and industry — rather than each individual's health. Most group plans require little or no evidence of insurability up to a guaranteed-issue limit, which is why group coverage is accessible to people who might be declined individually.

Product form and key requirements

The predominant group life form is Group Term Life — annually renewable term with no cash value. To prevent adverse selection, insurers impose participation and eligibility rules:

• For noncontributory plans (employer pays 100%), 100% of eligible employees must be covered.
• For contributory plans (employees share cost), typically at least 75% must participate.
• Coverage cannot be based on individual selection of amounts; benefits are tied to a nondiscriminatory schedule (e.g., a flat amount or a multiple of salary).

A probationary period (waiting period for new hires) and an eligibility period (window to enroll without evidence) are common.

Conversion privilege

If an insured leaves the group (termination or the plan ends), the conversion privilege allows converting to an individual whole life policy without evidence of insurability, generally within 31 days. Traps to remember:

• The conversion is to a permanent/whole life plan, not term, and at the insured's attained-age rate.
• The face amount cannot 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 not yet completed.

This is parallel to the conversion features tested in group health and reflects continuity-of-coverage protection.

Taxation of group life — the $50,000 rule

Employer-paid group term life premiums are a deductible business expense for the employer. For the employee, the cost of the first $50,000 of employer-provided group term coverage is a tax-free fringe benefit. The premium cost of coverage above $50,000 is imputed income to the employee, calculated using the IRS Table I (uniform premium per $1,000 by age), and added to taxable wages.

Example: An employee has $150,000 of employer-paid group term life. Only the Table I cost of the $100,000 above the $50,000 threshold is imputed as taxable income; the death benefit itself remains fully income-tax-free to the beneficiary.

Eligible groups and noncontributory vs. contributory

Not every collection of people is an insurable group. Eligible groups must exist for a purpose other than obtaining insurance — single-employer groups, multiple-employer trusts (METs), labor unions (Taft-Hartley plans), trade associations, and creditor-debtor groups (group credit life). The creditor group is a special case: the lender is the policyowner-beneficiary, and coverage cannot exceed the outstanding loan balance.

Noncontributory plans (employer pays 100%) require all eligible employees to participate, eliminating selection. Contributory plans (employees pay part) need ~75% participation. Higher employee cost raises adverse-selection risk, so the participation floor protects the insurer's risk pool.

Conversion vs. continuation and AD&D

Distinguish conversion (to an individual whole life policy on leaving the group) from continuation features. On conversion, premiums jump to individual attained-age rates, which the exam frames as the cost of guaranteed insurability.

Group plans frequently bundle Accidental Death & Dismemberment (AD&D), paying the principal sum for accidental death and a scheduled percentage (capital sum) for losses like a hand, foot, or sight. AD&D pays only for accidental loss, not natural-cause death, and 'double indemnity' refers to paying twice the face amount for accidental death. Dependent coverage (spouse and children) is also common, usually in small flat amounts with the employee as beneficiary.

Group underwriting concepts tested

Because individual evidence of insurability is minimal, insurers manage risk through plan design rather than medical exams:

• Probationary period: a waiting period (e.g., 30 days) before a new hire is eligible.
• Eligibility (enrollment) period: typically a 31-day window to enroll without evidence; enrolling late triggers an evidence requirement.
• Actively-at-work provision: the employee must be working on the date coverage begins.
• Experience rating (large groups) prices on the group's own claims; community rating (small groups) pools many groups.

These controls let group term life remain guaranteed-issue up to a limit while still discouraging adverse selection, the central tension the exam probes in group questions.

Remember the structural contrast with individual insurance: in a group plan the certificate holder cannot name the policyowner's terms, the master policyowner can amend or cancel the master contract, and rates are renegotiated periodically rather than guaranteed for life. The employee's protection is the conversion privilege, which preserves coverage when the group relationship ends. This is the recurring theme: group coverage is cheaper and easier to obtain, but less permanent and less individually controlled than a personally owned policy.