8.3 Group Life Insurance

Characteristics of Group Life Insurance

Group life insurance covers many people under a single master contract issued to the sponsor (usually an employer). Individual members receive a certificate of coverage, not a policy. Because the group is underwritten as a whole, individuals generally do not provide evidence of insurability up to a guaranteed-issue limit — a key advantage that makes coverage broadly accessible.

The vast majority of group life is annually renewable term, providing pure death protection with no cash value. Premiums are typically experience-rated and lower per unit than individual coverage because of group efficiency and reduced adverse selection.

The sponsor must have a legitimate purpose beyond obtaining insurance — an employer-employee, union, association, or creditor-debtor relationship. Coverage amounts are usually tied to a nondiscriminatory formula such as a multiple of salary, so the employer cannot single out one person for an oversized benefit.

Eligibility and Anti-Selection Controls

To prevent only the unhealthy from enrolling, group plans use eligibility rules: a defined eligible class (e.g., all full-time employees), an eligibility/probationary period, and an enrollment window. If an employee declines and later wants in, the insurer may require evidence of insurability.

Contributory vs non-contributory matters:

• Non-contributory — employer pays 100%; 100% participation of eligible employees is required.
• Contributory — employees share the cost; typically at least 75% participation of eligible employees is required.

Conversion Privilege

When an employee leaves the group (termination, retirement) or coverage ends, the conversion privilege lets them convert to an individual whole life policy without evidence of insurability. Key rules:

• Conversion is to a permanent (whole life) policy, not term.
• The employee generally has 31 days to apply.
• The premium is based on attained age and standard rates.

If the employee dies during the 31-day conversion period, the group death benefit is payable even if conversion was never completed.

Group Life Plan Types and Tax Treatment

The defining tax rule of group term life is IRC Section 79: employer-paid premiums for the first $50,000 of group term life coverage are a tax-free benefit to the employee. Premiums attributable to coverage above $50,000 create imputed income — a taxable amount based on the IRS Table I rates, which rise with the employee's age.

The employer can generally deduct the premiums it pays as a business expense (provided the employer is not the beneficiary).

Worked Section 79 Imputed Income Example

An employer provides an employee $130,000 of group term life. Only the cost of coverage above $50,000 is imputed income.

• Excess coverage = $130,000 − $50,000 = $80,000, i.e., 80 units of $1,000.
• Suppose Table I rate for the employee's age bracket = $0.10 per $1,000 per month.
• Monthly imputed income = 80 × $0.10 = $8.00
• Annual imputed income = $8.00 × 12 = $96.00

That $96 is added to the employee's W-2 wages and taxed. Any premium the employee pays themselves reduces the imputed amount dollar-for-dollar.

Group Plan Types Reference

Group vs Individual Underwriting

Group underwriting evaluates the group's characteristics — size, industry, age and gender mix, prior claims experience — rather than each member's health. The larger the group, the more credible its own experience and the more stable the rates. Small groups may be pooled with others. This is why a healthy individual sometimes finds individual coverage cheaper, while a less-healthy person almost always benefits from guaranteed group coverage.

Continuation, Portability, and Beneficiary Rules

Many group plans now offer portability — the ability to keep group term coverage at group rates after leaving — as an alternative to conversion to whole life. Where federal continuation rules apply, employees losing eligibility may extend coverage for a limited period. The exam distinguishes conversion (to individual permanent, no EOI, 31 days) from portability (keep group term).

Beneficiary designations under group certificates work like individual policies: the employee names primary and contingent beneficiaries and can change them unless an irrevocable designation was made.

Group Underwriting Factors and Probationary Periods

Group rates reflect the composition of the group: average age, gender mix, occupation hazard, geographic location, and prior claims experience. A probationary period (e.g., 30 days) delays eligibility for new hires and reduces administrative churn. An enrollment (eligibility) period — often 31 days after becoming eligible — is the window to enroll without evidence of insurability.

Missing the enrollment window typically subjects a late entrant to underwriting. These controls, plus minimum participation rules, keep adverse selection low and premiums affordable for the whole group.

Section 79, the $50,000 Threshold, and Conversion Timing

Employer-provided group term life is a major exam topic. Under IRC Section 79, the cost of the first $50,000 of employer-paid coverage is tax-free to the employee. Coverage above $50,000 creates imputed income - the employee is taxed on the IRS Table I cost of the excess.

Conversion and Continuation

When employment ends, the employee generally has 31 days to convert group term coverage to an individual policy without evidence of insurability - at the individual (higher) rate, on a permanent plan.

Worked Section 79 trap: an employee with $150,000 of employer-paid group term has $100,000 of "excess" coverage; the Table I cost of that $100,000, minus any employee contributions, is added to taxable W-2 wages. Examiners test that only the excess over $50,000 is taxed, not the whole benefit, and that conversion is to an individual permanent policy - not continued group term.