8.3 Group Life Insurance

Characteristics of Group Life Insurance

Group life insurance covers many people under a single master contract issued to the group sponsor (usually an employer). Individual members receive a certificate of coverage, not a policy. The most common form is group term life, providing temporary protection with no cash value.

Key Group Concepts

• Master contract / certificate — the employer holds the master policy; employees get certificates.
• Experience rating vs. community rating — large groups are priced on their own claims experience; small groups on pooled (community) rates.
• Reduced underwriting — most group coverage is guaranteed issue up to a limit; no individual medical exam is required for the basic amount.
• Adverse selection control — to prevent only sick people enrolling, plans require minimum participation: typically 100% participation for non-contributory (employer-paid) plans and 75% for contributory (employee-paid) plans.

Contributory vs. Non-Contributory

Taxation of Group Term Life: The $50,000 Rule

This is one of the most heavily tested national rules. Under IRC Section 79, the first $50,000 of employer-paid group term life coverage is tax-free to the employee. The cost of coverage above $50,000 is imputed income — the employee pays income tax on the value (per the IRS Table I cost) of that excess coverage.

• Employer premium for the first $50,000: not taxable to the employee.
• Employer premium for coverage over $50,000: taxable imputed income to the employee.
• The death benefit itself remains income-tax-free to the beneficiary regardless of amount.

Worked Example: Imputed Income

An employer provides $130,000 of group term life. The excess over $50,000 is $80,000. Using the IRS Table I rate (illustrative $0.10 per $1,000 per month) for the employee's age band:

The employee reports $96 of imputed income for the year — not the full premium and not the death benefit.

Conversion and Continuation

When an employee leaves the group, group term life includes a conversion privilege: the employee may convert to an individual whole life policy (not term) without evidence of insurability, usually within 31 days of termination. Coverage continues during this 31-day grace/conversion period even if the employee dies before converting.

• Conversion — to an individual permanent policy at the insured's attained-age rate; no medical exam.
• Portability — some plans let the employee keep group term coverage at group rates.
• Continuation (COBRA) — applies primarily to group health, not group life, though some states extend continuation rights.

Exam trap: Group term life converts to an individual permanent (whole life) policy, not to another term policy, and conversion does not require proof of insurability.

Dependent and Supplemental Coverage

Many group plans offer small amounts of dependent life coverage (spouse and children) and optional supplemental or voluntary life that the employee pays for. Supplemental coverage above guaranteed-issue limits typically requires evidence of insurability (a simplified health questionnaire). The basic employer-paid layer remains guaranteed issue.

Federal Framework: ERISA

Employer-sponsored group life is governed by ERISA, which imposes fiduciary duties, reporting, and disclosure. Employees must receive a Summary Plan Description (SPD) describing benefits, eligibility, and claims procedures. ERISA does not set benefit amounts; it sets the rules of plan administration and participant protection. Plans must also comply with the Age Discrimination in Employment Act, which permits benefit reductions for older workers only if justified by cost.

Group Underwriting Factors

Insurers underwrite the group as a whole, not individuals, considering: the nature of the industry, the size and age/sex distribution of the group, the stability of the group (turnover), and the purpose of the group (it must exist for reasons other than buying insurance). A larger, younger, more stable group earns better rates.

Section 79, the $50,000 Threshold, and Imputed Income

The signature tax rule of group term life is IRC Section 79: the first $50,000 of employer-paid group term life coverage is income-tax-free to the employee. Coverage above $50,000 creates imputed income -- the cost of the excess, computed from the IRS Table I rates, is added to the employee's taxable wages even though no cash changed hands. Employer premiums for group term life are a deductible business expense.

Conversion Rights and Assignment

When an employee leaves, the group term conversion privilege lets them convert to an individual permanent (whole life) policy without evidence of insurability, generally within 31 days, at the insurer's then-current individual rate for their attained age. During that 31-day conversion period the group coverage continues, so a death in the window is still paid.

Worked Imputed-Income Example

An employer provides $150,000 of group term life. The first $50,000 is tax-free, leaving $100,000 of excess coverage. If Table I prices that age band at, say, $0.10 per $1,000 per month, the monthly imputed cost is 100 x $0.10 = $10, or $120 per year added to the employee's W-2 wages -- modest, but testable as the mechanism, not the exact figure.

Dependent and Voluntary Group Life

Plans may add small amounts of dependent group life (often a few thousand dollars on a spouse or child, where the employee is the beneficiary) and voluntary/supplemental group life the employee pays for, sometimes requiring evidence of insurability above the guaranteed-issue limit.

Additional Exam Traps

• Only the first $50,000 of employer-paid group term is tax-free; excess creates imputed income.
• Group term converts to an individual permanent policy, not to another group term plan.
• Employer-paid group term premiums are deductible to the employer.