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, union, or association). Individuals receive a certificate of insurance, not a policy. The group sponsor is the policyowner; the employees are the insureds.

Defining Features

• Group underwriting, not individual. The carrier evaluates the group's characteristics (size, occupation, age distribution), so most members are insured without medical exams.
• The group must form for a purpose other than obtaining insurance (e.g., employment) to prevent adverse selection.
• The standard form is annually renewable term (ART) — pure protection with no cash value.
• Coverage amounts use a nondiscriminatory formula (e.g., a flat $50,000, or a multiple of salary) so the employer cannot favor key executives.

Contributory vs Noncontributory

The high participation thresholds exist to prevent adverse selection — if only sick employees enrolled, claims would spike. Noncontributory plans require 100% participation precisely because the employee bears no cost and there is no reason to opt out.

Conversion and Continuation

When an employee leaves the group, the group coverage normally ends. A key protection is the conversion privilege: the departing employee may convert to an individual whole life policy (not term) without evidence of insurability, typically within 31 days of termination. During that 31-day conversion period, the employee remains covered.

Conversion Rules to Memorize

• Convert to an individual permanent policy at the insurer's then-attained-age rates.
• No medical underwriting required.
• The face amount generally cannot exceed the group coverage being lost.
• The 31-day grace/conversion window means a death during that period is still a covered claim.

Taxation of Group Life (Section 79)

Employer-paid group term life is a fringe benefit with a special tax rule. The premium for the first $50,000 of coverage is tax-free to the employee — the employer deducts it and the employee reports no income.

Imputed Income Above $50,000

Coverage above $50,000 creates imputed income: the employee is taxed on the cost of the excess coverage, calculated using the IRS Table I uniform premium rates (which rise with age), reduced by any amount the employee paid.

Worked example. An employer provides $130,000 of group term life. Only the cost of the $80,000 above the $50,000 exclusion is imputed income. If the Table I rate for the employee's age is $0.10 per $1,000 per month, the monthly imputed cost is 80 × $0.10 = $8.00, or $96/year added to the employee's W-2.

Exam trap: The employer's premium for the first $50,000 is deductible to the employer and tax-free to the employee — only the excess is taxed, and only the cost (Table I), not the death benefit.

Eligibility, Probationary, and Enrollment Periods

New employees typically face a probationary period (e.g., 30 days) before becoming eligible, followed by an eligibility (enrollment) period of about 31 days during which they may enroll without evidence of insurability. An employee who waits beyond that window — a late enrollee — must usually provide proof of insurability, because delaying suggests adverse selection.

Group Underwriting Factors and Experience Rating

The insurer prices a group on its composition: average age, gender mix, occupation hazard, group size, and prior claims (experience rating for large groups; community rating for small ones). Larger groups are more stable and cheaper per member. Because individual underwriting is waived, the carrier relies on the steady flow of new, generally healthy members to dilute risk.

Dependent and Supplemental Coverage

Many group plans add small dependent life amounts and allow employee-paid supplemental (voluntary) coverage above the base. Supplemental amounts above the guaranteed-issue limit usually require simplified underwriting. These employee-paid amounts are funded with after-tax dollars and do not change the Section 79 treatment of the employer-paid base.

Group vs Individual Life — Key Contrasts

Understanding how group differs from individual coverage is heavily tested. The differences flow from the master-contract structure and group underwriting:

Actively-at-Work and Plan Termination

Most group plans contain an actively-at-work provision: coverage for a new employee takes effect only if the employee is performing normal duties on the effective date; otherwise it is deferred. If the master contract terminates, coverage on all certificate-holders ends, but most states require the insurer to extend the conversion privilege to affected employees. A disabled employee may keep coverage under an extension of benefits or waiver of premium provision even after the group plan would otherwise end their eligibility.

Group Permanent and Franchise Plans

While group term dominates the market, some employers offer group permanent plans that build cash value, and group universal life that lets employees adjust coverage. Franchise (wholesale) life is a related arrangement for groups too small for true group underwriting: each member receives an individual policy at a discounted rate through the common sponsor, with light individual underwriting.

The Section 79 $50,000 exclusion applies to employer-paid group term life; cash-value group permanent and employee-paid franchise coverage do not get that automatic tax-free treatment, so the imputed-income analysis differs. When the exam contrasts plan types, anchor on the master-contract test: true group means one contract and certificates, while franchise means many individual policies marketed as a group.