8.3 Group Life Insurance

Group Life Insurance Fundamentals

Group life insurance covers many people under a single master contract issued to a sponsor — usually an employer, but also unions, associations, and creditors. Individuals receive a certificate of insurance, not a policy. The exam stresses that the group, not the individual, is the contract holder, which changes underwriting, cost, portability, and taxation. Most group life is annually renewable term, providing pure death protection with no cash value.

Underwriting and Eligibility

Group coverage uses group underwriting, not individual medical underwriting. The insurer evaluates the group as a whole — its size, industry, turnover, and demographics — rather than each member's health. To prevent adverse selection, insurers require:

• A group formed for a purpose other than obtaining insurance.
• A minimum participation level — typically 75% for contributory plans and 100% for noncontributory (employer-pays-all) plans.
• A nondiscriminatory benefit formula (e.g., a flat amount, or a multiple of salary), so individuals cannot self-select large amounts.

Contributory vs. Noncontributory

Late enrollees in a contributory plan may have to show evidence of insurability. Noncontributory plans cover all eligible full-time employees automatically, which keeps adverse selection low.

Conversion and Portability

A hallmark group provision is the conversion privilege. On termination of employment or loss of eligibility, the insured may convert group coverage to an individual whole life policy — without evidence of insurability — within a set window, typically 31 days (the conversion period). Important traps:

• The convertible amount is generally limited to the prior group coverage.
• The new individual premium is based on attained age and standard rates, so it is higher.
• If the employee dies during the 31-day conversion period, the group death benefit is still payable even if conversion was not completed.

Taxation of Group Life Insurance

Under IRC Section 79, an employer may provide up to $50,000 of group term life coverage to an employee with no taxable income to the employee — the premium is a tax-free fringe benefit. Coverage above $50,000 creates imputed income: the cost of the excess coverage (using the IRS Table I uniform-premium rates) is added to the employee's taxable wages.

Employer-paid premiums are a deductible business expense. The death benefit remains income-tax-free to the beneficiary.

Worked Section 79 Example

An employer provides $130,000 of group term life. The first $50,000 is tax-free. The employee is taxed on the imputed cost of the $80,000 excess.

If the IRS Table I monthly rate for the employee's age bracket is $0.10 per $1,000, the monthly imputed cost = ($80,000 ÷ $1,000) × $0.10 = $8.00, or $96 per year added to taxable wages. If the employee contributes toward the premium, that contribution reduces the imputed amount dollar-for-dollar. This small annual figure — not the full premium — is what the exam expects you to recognize as taxable.

Eligible Groups and the Probationary Period

State law and federal rules limit which groups may be insured to discourage groups formed only to buy insurance. Commonly eligible groups include:

• Single-employer groups — the most common.
• Multiple-employer trusts (METs) and association groups.
• Labor union groups and creditor groups (covering the outstanding loan balance of debtors).

Many plans impose a probationary period (e.g., 30–90 days) before a new employee becomes eligible, followed by an enrollment (eligibility) period during which a contributory enrollee can sign up without evidence of insurability. Missing that window typically forces a late enrollee to prove insurability. Coverage usually requires the member to be actively at work on the effective date.

Group vs. Individual Life: Key Contrasts

The exam loves to contrast group and individual coverage. Remember these distinctions:

Because group rates reflect the pooled experience of the entire group, a healthy individual may find group coverage cheaper than they could buy alone — but they lose that pricing on conversion, when individual attained-age rates apply.

The $50,000 Section 79 Threshold

The single most tested group-life tax rule is the $50,000 threshold under IRC Section 79. Employer-paid premiums for the first $50,000 of group term life coverage are a tax-free benefit to the employee. Coverage above $50,000 creates imputed income: the cost of the excess coverage, measured by the IRS Table I rate for the employee's age rather than the employer's actual premium, is added to the employee's taxable wages.

Work it: a 45-year-old with $150,000 of employer-paid group term has $100,000 of excess coverage; if the Table I rate for age 45 is $0.15 per $1,000 per month, the monthly imputed income is 100 times $0.15, or $15, totaling $180 of taxable income for the year, reduced by any after-tax premiums the employee contributes.

Group-life mechanics round out the unit. Coverage is written under a master contract to the employer, and individual employees receive certificates of insurance rather than policies. No individual evidence of insurability is required for amounts within the plan's guaranteed-issue limit, because underwriting is done on the group as a whole. On termination, the employee has a conversion privilege, usually 31 days, to convert to an individual whole life policy at attained-age rates with no evidence of insurability, and death during that 31-day window is covered even if conversion was not yet completed.

The exam often tests that conversion is to permanent insurance, not term, and that the employee, not the employer, pays the new individual premium.