8.3 Group Life Insurance

Group Life Insurance

Group life insurance covers many people under a single master contract issued to the group sponsor (usually an employer). Individuals do not receive their own policy; instead each insured member gets a certificate of insurance evidencing coverage. The defining characteristic is that the group, not the individual, is underwritten — this allows simplified or guaranteed-issue underwriting.

Most group life is annually renewable term (ART), so it builds no cash value. Because the group spreads risk across many lives, premiums are typically lower than equivalent individual coverage, and experience rating lets the insurer adjust renewal premiums based on the group's actual claims.

Group Underwriting Principles

To prevent adverse selection, group plans rely on several controls:

• The group must exist for a reason other than obtaining insurance (a real employer, union, or association).
• A minimum participation requirement applies: typically 75% of eligible employees for contributory plans (employees pay part of the premium), and 100% for non-contributory plans (employer pays the entire premium).
• Coverage is usually limited to a non-discriminatory benefit formula (e.g., a multiple of salary or a flat amount by class), so individuals cannot select against the plan.
• New employees enroll during an eligibility/probationary period, after which there is an enrollment period; late enrollees may face evidence of insurability.

Conversion and Continuation

When an employee leaves the group, the group coverage ends, but a conversion privilege applies. The departing employee may convert to an individual whole life policy without evidence of insurability, provided they apply (typically within 31 days). The premium is based on the insured's attained age, and there is a 31-day grace/conversion period during which the person remains covered.

A frequently tested trap: conversion is to a permanent (whole life) policy at individual rates, not to a continued group term policy — and no medical exam is required if applied for within the conversion window.

Tax Treatment — IRC Section 79

Employer-paid group term life enjoys a key tax break under IRC Section 79: the cost of the first $50,000 of coverage is tax-free to the employee (the employer's premium is not imputed income).

For coverage above $50,000, the cost of the excess — valued using the IRS Table I uniform-premium rates, not the actual premium — is imputed income to the employee and is subject to income and payroll tax.

The death benefit itself, as with all life insurance, is received income-tax free by the beneficiary.

Group life also comes in several structural varieties you should recognize. Group permanent and group ordinary plans build cash value (unlike the dominant group term form). Dependent group life can add small face amounts on a spouse and children, and survivor income benefit plans pay an ongoing income to a surviving dependent rather than a lump sum.

Franchise/wholesale life insurance issues individual policies to members of a small group too tiny for true group underwriting. Regardless of form, the Section 79 $50,000 exclusion and the income-tax-free death benefit are the two most heavily tested tax facts.

Worked Section 79 Example

An employer provides an employee $150,000 of group term life and pays the entire premium.

• The first $50,000 is tax-free under Section 79.
• The excess is $100,000. Assume the Table I monthly cost for the employee's age is $0.10 per $1,000.
• Monthly imputed cost = 100 (thousands) × $0.10 = $10.00, or $120 per year of imputed income reported on the W-2.

Note that any premium the employee contributes toward the excess reduces the imputed amount dollar-for-dollar. If the employee paid $40 toward the year, imputed income would drop to $80. Voluntary supplemental group life the employee fully pays after-tax creates no imputed income.

Group Term Life — The §79 Tax Rule

Employer-paid group term life is a deductible business expense, and the employee pays no tax on the first $50,000 of coverage. Above $50,000, the imputed cost (from the IRS Table I rates, based on the employee's age) is added to the employee's taxable income — even though the employer pays the premium.

Worked Example: An employer provides $150,000 of group term life. The first $50,000 is tax-free; the imputed cost of the remaining $100,000 (using the age-based Table I rate, minus any employee contribution) is reported as taxable income on the W-2.

Conversion and Eligibility

A terminating employee may convert group coverage to an individual permanent policy (not term) within 31 days, with no evidence of insurability, at the insurer's standard individual rate for the attained age. During the conversion window the group coverage continues. Eligibility typically requires being a full-time employee in an eligible class; the plan is documented by a master policy to the employer and certificates to employees.