8.3 Group Life Insurance

Characteristics of Group Life Insurance

Group life insurance covers many people under a single master contract issued to a sponsor (typically an employer, association, or union). Key structural facts the exam loves:

• The employer/sponsor holds the master policy; individual employees receive a certificate of insurance — they are not policyowners.
• The plan is annually renewable term in most cases, so coverage is pure protection with no cash value.
• Coverage amounts are usually set by a formula or class (e.g., 1× or 2× salary) rather than individual selection, which discourages adverse selection.
• Underwriting is on the group as a whole, not the individual. Small groups receive guaranteed issue up to a limit with no medical exam; amounts above the guaranteed issue limit may require evidence of insurability.

Contributory vs. Noncontributory

Why the participation rule? High participation spreads risk and prevents only the unhealthy from enrolling (adverse selection). Noncontributory plans require all eligible employees because no one self-selects out.

Eligibility, Enrollment, and Active Work

• Eligibility period (enrollment window): new hires get a window (often 30–31 days) to enroll without evidence of insurability. Enroll late and the employee must show evidence of insurability.
• Active work requirement: coverage typically begins only when the employee is actively at work on the effective date; otherwise it is deferred until they return.
• Probationary period: a waiting period (e.g., 30–90 days) before a new employee becomes eligible.

Experience Rating vs. Community Rating

Large groups are usually experience rated — their premium reflects the group's own claims history, so a group with low claims earns lower renewal rates. Small groups are typically community rated, pooled with similar groups so that one group's bad year does not spike its rate. Experience rating rewards healthy, stable groups and is why large employers often secure cheaper coverage than an individual could buy alone. This pooling, combined with the master-contract structure, is what makes group life inexpensive per $1,000 of coverage.

IRC Section 79: Taxation of Group Term Life

This is one of the most-tested numeric rules in the National L&H exam. Under IRC Section 79, employer-paid group term life insurance is a tax-favored fringe benefit, but only up to a limit:

The first $50,000 of employer-provided group term life coverage is tax-free to the employee. The cost of coverage above $50,000 is imputed income — taxable to the employee using the IRS Table I uniform premium rates (based on the employee's age), not the employer's actual cost.

Worked Example: Imputed Income

An employee receives $150,000 of employer-paid group term life.

• Tax-free portion: first $50,000
• Taxable (imputed) coverage: $150,000 − $50,000 = $100,000
• The employee reports imputed income on $100,000 using the age-based Table I rate (the actual premium the employer paid is irrelevant).

Conversion and Continuation

When group coverage ends (termination of employment), the employee has rights:

• Conversion privilege: the employee may convert to an individual whole life policy without evidence of insurability, typically within 31 days. The premium is at the insured's attained age and standard rates.
• The 31-day extension of benefits: if the employee dies during the 31-day conversion period, the group death benefit is paid even if the employee never applied to convert.
• Portability: lets the employee keep group term coverage (often at group rates), which differs from conversion (to an individual permanent policy).

Group Plan Types

• Group term life — most common; pure protection, subject to §79.
• Group universal life (GUL) — permanent, employee-funded, builds cash value, often portable.
• Dependent group life — small face amounts on spouse/children.
• Group credit life — pays the outstanding balance of a loan if the borrower dies; the lender is the beneficiary and benefit decreases as the loan is repaid.

Group term has no cash value, so there is nothing to borrow against and nothing to surrender — it is pure protection priced by the group's risk. GUL adds a savings element the employee owns. Because group rates rise with the group's average age, conversion to an individual policy can be valuable for an older terminating employee even at attained-age premiums, since their individual rate elsewhere would also be high or they may be uninsurable.

Trap: Conversion is to an individual permanent policy at attained-age rates with no medical exam — students often wrongly assume premiums stay at the old group rate or that a physical is required.

ERISA and Federal Oversight

Most private-employer group plans are governed by ERISA (1974), which sets fiduciary, disclosure, and reporting standards. Participants must receive a Summary Plan Description (SPD), and plan fiduciaries who breach their duties can be held personally liable. Government and church plans are generally exempt from ERISA. ERISA preempts conflicting state laws for self-funded plans, which is why some employer health and life arrangements are regulated federally rather than by the state insurance department — a distinction the National portion likes to test.