8.3 Group Life Insurance

Group Life Insurance

Group life insurance covers many individuals under a single master contract issued to a sponsor — typically an employer, but also unions, associations, and creditors. Individual employees receive a certificate of coverage, not a policy. The exam emphasizes the structural differences from individual insurance, underwriting, and the tax treatment of employer-paid premiums.

Characteristics of Group Insurance

• The group sponsor (employer) is the policyowner; covered members are insureds.
• Coverage is almost always annually renewable term, so it builds no cash value.
• Premiums are lower per unit because of spread risk and lower administrative cost.
• A minimum participation requirement applies: if non-contributory (employer pays 100%), typically 100% of eligible employees must be covered; if contributory (employees share cost), usually at least 75% must enroll. These thresholds prevent adverse selection.

Underwriting and Eligibility

Group underwriting evaluates the group as a whole, not each individual, so most members get coverage with no evidence of insurability up to a guaranteed-issue limit. Coverage must be incidental to the group — the group cannot be formed solely to buy insurance. Benefit amounts are set by a nondiscriminatory formula (e.g., a flat $50,000, or a multiple of salary) so individuals cannot select against the plan.

Conversion Privilege

When an employee leaves the group, they have a conversion right — usually 31 days — to convert to an individual permanent (whole life) policy without evidence of insurability. Note the traps: the converted policy is whole life (not term), is issued at the insured's attained age rate, and the conversion right is to an individual policy, not continuation of the group term. If the insured dies during the 31-day conversion period, the group death benefit is payable even if no conversion application was made.

Tax Treatment of Group Life — The $50,000 Rule

Employer-paid group term life premiums are a deductible business expense for the employer and are generally not taxable income to the employee — but only up to $50,000 of coverage. The cost (per IRS Table I) of coverage exceeding $50,000 is imputed income taxable to the employee.

Worked Example — Imputed Income

An employer provides $130,000 of group term life. The first $50,000 is tax-free. The cost of the remaining $80,000, computed using the IRS Table I rate, is added to the employee's W-2 as imputed income.

The death benefit itself remains income-tax-free to the beneficiary regardless of the coverage amount — the $50,000 rule affects only the taxation of premiums, not proceeds.

Note the offsets: any amount the employee pays toward the coverage with after-tax dollars reduces the imputed income dollar-for-dollar, and Table I rates rise with age, so older employees with large coverage face larger imputed amounts.

Experience Rating and Group Premiums

Large groups are often experience-rated — the insurer adjusts the renewal premium based on the group's own claims history, rewarding low-claim groups with lower rates. Small groups are community-rated, pooled with similar employers so no single small group is penalized for one bad year. Because group term is annually renewable, premiums can change at renewal as the group's age, size, and claims evolve.

The employer's ability to deduct premiums as an ordinary business expense, combined with the employee's $50,000 tax-free benefit, makes group term life one of the most tax-efficient employee benefits. The exam expects you to connect these threads: who owns the contract (the employer), who is covered (the certificate holders), how it is taxed (deductible to employer, tax-free to employee up to $50,000), and what happens at termination (31-day conversion to individual permanent coverage with no evidence of insurability).

Contributory vs Non-Contributory Plans

The funding arrangement drives both participation rules and certificate features:

• Non-contributory: the employer pays the entire premium. Because no employee opts out, essentially 100% of eligible employees must be covered, which eliminates adverse selection entirely.
• Contributory: employees pay part of the premium (often via payroll deduction). Insurers require at least 75% participation of eligible employees so that healthy members do not disproportionately decline coverage.

A newly eligible employee usually has an enrollment window during which coverage is guaranteed-issue; enrolling late, after the window, can require evidence of insurability. The probationary period (commonly 30–90 days) sets when a new hire becomes eligible.

Group Life Plan Types

• Group term life — the dominant form; pure death protection, annually renewable, no cash value.
• Group permanent / universal — less common; builds cash value but costs more.
• Dependent coverage — small face amounts on a spouse/children, often with imputed income on the employee.
• Group creditor life — covers a borrower so the lender is repaid at death; the creditor is beneficiary up to the loan balance. State law caps the amount to the actual debt to prevent over-insurance.

Continuation and Portability

Beyond the 31-day conversion privilege, some groups offer portability, letting a departing employee keep group term coverage (rather than converting to permanent), often at a higher group rate. The distinction matters on the exam: conversion is a guaranteed right to an individual permanent policy; portability is an optional feature continuing group term.

When a group policy itself is terminated and replaced, extension of benefits rules may continue coverage for a member who is totally disabled at the time of termination. The replacing insurer typically must give credit for time already served toward any new probationary or pre-existing-condition provisions, protecting members from coverage gaps.

Section 79 and the Discrimination Trap

The favorable $50,000 exclusion is granted under IRC Section 79. If a group term plan discriminates in favor of key employees, those key employees lose the exclusion and must include the greater of actual cost or Table I cost of their entire coverage in income — even the first $50,000. This is why plan design must apply a uniform, nondiscriminatory benefit formula across all eligible employees.