8.3 Group Life Insurance

Group Life Insurance

Group life insurance covers many people under a single master contract issued to a sponsor (usually an employer). Individuals do not receive a policy; they receive a certificate of coverage. Because the insurer underwrites the group rather than each individual, group coverage is cheaper, often requires no medical exam, and is the most common form of employer-provided life insurance the exam tests.

Characteristics and Underwriting

Key group concepts:

• Master policy is owned by the employer/sponsor; employees get certificates.
• Coverage is typically annually renewable term.
• Underwriting evaluates the group as a whole; no individual medical exam for amounts up to a guaranteed-issue limit.
• To prevent adverse selection, plans require a minimum participation percentage (e.g., 75% of eligible employees for contributory plans; 100% for fully employer-paid noncontributory plans).
• Benefit amounts are tied to a nondiscriminatory formula (flat amount, multiple of salary, or class).

Contributory vs Noncontributory Plans

Noncontributory plans require everyone to participate precisely because the employer pays — there is no anti-selection from employees opting in or out.

Conversion and Continuation Rights

When an employee leaves the group, group life includes a conversion privilege:

• The employee may convert to an individual whole life (permanent) policy without evidence of insurability.
• Conversion must usually be elected within 31 days (the conversion period) of termination.
• Premiums on the new individual policy are at the insurer's standard rate for the employee's attained age.
• During the 31-day period, coverage continues; if the employee dies during it, the group death benefit is paid even if conversion was not yet completed.

Taxation of Group Life — The $50,000 Rule

The most-tested group-life tax fact under IRC Section 79:

• Employer-paid premiums for the first $50,000 of group term life are a tax-free benefit to the employee.
• Premiums covering coverage above $50,000 create imputed income — the cost (per the IRS Table I rate, by age) is added to the employee's taxable W-2 wages.
• The death benefit is still income-tax-free to the beneficiary regardless of amount.
• Employer premiums are a deductible business expense.

Worked Imputed-Income Example

Example: A 46-year-old employee has $130,000 of employer-paid group term life.

• Coverage subject to imputed income = $130,000 − $50,000 = $80,000 (= 80 units of $1,000).
• Suppose the IRS Table I monthly rate for ages 45–49 is $0.15 per $1,000.
• Monthly imputed income = 80 × $0.15 = $12.00; annual = $144.
• That $144 is added to the employee's taxable wages — even though no cash changed hands.

The exam tests the concept (only coverage over $50,000 is imputed) more than exact table rates.

Section 79 Imputed-Income Worked Example

Under IRC Section 79, employer-paid group term life is tax-free to the employee only up to $50,000 of coverage. Coverage above $50,000 generates imputed income based on the IRS Table I monthly cost per $1,000, by age — added to taxable wages even though no cash is received. The death benefit remains income-tax-free to the beneficiary regardless of amount.

Worked example: A 46-year-old has $130,000 of employer-paid group term life. Coverage subject to imputed income = $130,000 − $50,000 = $80,000 (80 units). If the Table I monthly rate for ages 45–49 is $0.15 per $1,000, monthly imputed income = 80 × $0.15 = $12.00, or $144 per year added to W-2 wages. The exam tests the concept (only coverage over $50,000 is imputed) far more than exact table rates.

Conversion Privilege and the 31-Day Window

When an employee leaves the group, the conversion privilege lets them convert to an individual whole life policy without evidence of insurability, generally within 31 days of termination, at the insurer's standard rate for the employee's attained age. During that 31-day window coverage continues, so if the employee dies before converting, the group death benefit is still paid. Conversion is to a permanent policy — converting to term is a common distractor and is incorrect.

Dependent Group Life and Accelerated Benefits

Many group plans extend small amounts of dependent life coverage (spouse and children) under the same master contract, capped at modest face amounts and often requiring the employee to be insured first. Group certificates may also include an accelerated death benefit (living benefit) that pays a portion of the face early upon terminal illness — paid amounts reduce the death benefit and are generally income-tax-free when the insured is certified terminally ill.

Worked participation example: A contributory group life plan requires 75% participation. Of 80 eligible employees, only 54 enroll (67.5%). The insurer may decline or re-rate the group because under-participation signals adverse selection — the healthy opting out and the impaired opting in. Under a noncontributory (employer-pays-all) plan, 100% must be covered, which structurally eliminates that anti-selection.

Group Definition and Eligible Groups

Group life must cover a bona fide group formed for a purpose other than obtaining insurance — employer-employee groups, labor unions, trade associations, and creditor groups qualify. Coverage amounts must follow a nondiscriminatory formula (flat amount, multiple of salary, or by class) so benefits are not skewed toward owners or key executives. The exam tests that a group cannot be assembled solely to buy insurance, which is the line separating a true group from an illegal pooling arrangement.