8.3 Group Life Insurance
Key Takeaways
- Group life uses a master contract to the sponsor; members receive certificates, usually annually renewable term.
- Noncontributory plans require 100% participation; contributory plans generally require 75%.
- IRC Section 79 makes the first $50,000 of employer-paid group term life tax-free to the employee.
- Coverage over $50,000 creates imputed income based on IRS Table I cost, not the employer's premium.
- The conversion privilege lets terminating employees convert to individual whole life without evidence of insurability within 31 days.
Group Life Insurance
Group life insurance covers many people under a single master contract issued to a sponsor (usually an employer, but also unions, associations, and creditors). Individuals receive a certificate of insurance, not a policy. The exam tests eligibility, underwriting, the tax treatment under IRC Section 79, conversion, and key contract mechanics.
Master Contract and Certificates
The employer (policyowner) holds the master contract and is the named insured for administrative purposes; employees are the covered lives. Most group life is annually renewable term with no cash value. Coverage is typically a multiple of salary (e.g., 1× or 2× annual earnings).
Eligibility and Underwriting
- Eligible group: must be formed for a purpose other than buying insurance (no adverse selection).
- Group underwriting evaluates the group as a whole, not each individual — usually no medical exam up to a guarantee-issue limit.
- Actively-at-work provision: an employee must be actively working (not home sick) on the effective date for coverage to begin.
- Probationary period (e.g., 30–90 days) before a new hire is eligible, then an eligibility/enrollment period to elect coverage.
Noncontributory vs. Contributory
| Plan type | Who pays | Participation required |
|---|---|---|
| Noncontributory | Employer pays 100% | 100% of eligible employees |
| Contributory | Employee shares cost | Typically 75% of eligible employees |
The high participation requirements exist to prevent adverse selection — if only unhealthy employees enrolled, claims would spike.
Under a noncontributory group life plan, what percentage of eligible employees must be covered?
IRC Section 79: Taxation of Group Term Life
Employer-paid group term life is a valued benefit because of IRC Section 79: the cost of the first $50,000 of coverage is tax-free to the employee. The employer deducts premiums as a business expense.
Imputed Income on Coverage Over $50,000
For coverage above $50,000, the employee is taxed on the IRS Table I cost of the excess (not the employer's actual premium), reduced by any employee contributions.
Worked example: An employee age 45 has $130,000 of employer-paid group term life.
- Taxable excess coverage = $130,000 − $50,000 = $80,000 (in $1,000 units → 80 units).
- IRS Table I rate at age 45 ≈ $0.15 per $1,000 per month.
- Monthly imputed income = 80 × $0.15 = $12.00 → annual = $144.
- This $144 is added to the employee's W-2 as imputed income.
Trap: The imputed amount is based on Table I, not the employer's real premium, and only on the coverage exceeding $50,000.
Conversion Privilege
When employment ends, the employee has a conversion privilege: convert group coverage to an individual whole life policy (not term) without evidence of insurability, usually within 31 days. During that 31-day window, the group coverage continues even if the employee dies before converting. Premiums on the converted policy are at the insurer's standard rate for the employee's attained age.
An employee receives $90,000 of employer-paid group term life insurance. How much of this coverage creates taxable imputed income under IRC Section 79?
Types of Groups, Dependent Coverage, and Key Provisions
Eligible Group Types
Insurers recognize several legitimate group structures, all formed for a purpose other than obtaining insurance:
- Single-employer groups — the most common; coverage tied to employment.
- Multiple-employer trusts (METs) — small employers pool through a trust.
- Labor union (Taft-Hartley) groups — union sponsors coverage for members.
- Trade/professional association groups — members of a bona fide association.
- Creditor groups — a lender insures debtors so an outstanding loan is repaid at death; coverage cannot exceed the debt.
Dependent and Supplemental Coverage
Group plans often allow modest dependent life coverage (spouse and children) at low face amounts. Supplemental/voluntary group life lets employees buy additional coverage, often requiring evidence of insurability above the guarantee-issue limit.
Contract Provisions Worth Memorizing
| Provision | Function |
|---|---|
| Grace period | Time for the policyowner (employer) to pay premium without lapse |
| Conversion privilege | Convert to individual whole life within 31 days, no evidence required |
| Continuation/portability | Some plans let departing employees keep group-rate coverage |
| Assignment | Generally restricted; certificates are not freely assignable |
Worked Imputed-Income Example (Higher Age)
An employee age 60 carries $150,000 of employer-paid group term life. Excess over $50,000 = $100,000 = 100 units. Suppose the Table I monthly rate at age 60 is $0.66 per $1,000.
- Monthly imputed income = 100 × $0.66 = $66.00
- Annual imputed income = $792, added to the W-2.
Older employees face higher imputed income because Table I rates rise with age — a frequently tested concept.
Trap: Group term life has no cash value, so there is nothing to borrow against and no living tax issue except the Section 79 imputed income on coverage above $50,000.
Group Life Mechanics — Eligibility, Conversion, and the $50,000 Rule
Group life is almost always annually renewable term issued under a master contract held by the employer/sponsor; employees receive a certificate of insurance, not an individual policy. Underwriting is on the group as a whole (the law of large numbers applied to the workforce), so most plans require little or no individual evidence of insurability below a guaranteed-issue limit.
Key participation rules: noncontributory plans (employer pays 100%) require 100% eligible-employee participation; contributory plans (employees share cost) typically require at least 75% participation to control adverse selection.
The Conversion Privilege
On termination of employment, an insured may convert group coverage to an individual whole-life policy without evidence of insurability, usually within 31 days (the conversion/extension period), at the insurer's individual rates for the attained age. If the insured dies during the 31-day conversion period, the group death benefit is payable even if no conversion application was made. The converted policy may not be term and the face generally may not exceed the group amount.
Worked Tax Rule — IRC Section 79
Employer-paid group term life is a tax-favored benefit, but only up to a limit: the cost of the first $50,000 of employer-provided group term coverage is tax-free to the employee. The imputed cost of coverage above $50,000 (computed from the IRS Table I uniform premium rates by age, not the employer's actual cost) is taxable income to the employee.
Example: an employee has $130,000 of employer-paid group term life. The first $50,000 is tax-free; the remaining $80,000 generates imputed income using the Table I rate for the employee's age bracket. If that rate is $0.43 per $1,000 per month, monthly imputed income = (80 × $0.43) = $34.40, or about $412.80/year added to W-2 wages. Premiums the employer pays are deductible to the business as a reasonable compensation expense.