8.3 Group Life Insurance

Structure of Group Life Insurance

Group life insurance covers many people under a single master contract issued to a sponsoring entity — usually an employer, but also labor unions, trade associations, or creditor groups. The employer or sponsor is the policyowner and holds the master policy; individual covered members receive a certificate of insurance rather than their own policy. Most group life is written as annually renewable term, providing pure death-benefit protection with no cash value.

A key principle is that the group must exist for a purpose other than obtaining insurance to prevent adverse selection. Underwriting is done on the group as a whole (experience rating) rather than on each individual, which is why most members get coverage with little or no individual medical evidence.

Because the master policy belongs to the sponsor, the sponsor controls plan design, can amend coverage, and remits a single consolidated premium. Individual certificate holders cannot unilaterally change terms. This master/certificate structure is the single most-tested distinction between group and individual insurance, so anchor it firmly before moving on.

Eligibility and Non-Discrimination

To qualify for favorable tax treatment, group plans must generally cover a broad class of employees and avoid favoring only highly compensated individuals. Common provisions:

• Eligible classes must be defined by conditions of employment (e.g., all full-time employees), never by individual selection.
• Probationary period: A waiting period (often 30–90 days) before a new hire becomes eligible.
• Eligibility/enrollment period: A window (often 31 days) during which an employee may enroll without evidence of insurability.
• Non-contributory plans (employer pays 100%) require 100% participation; contributory plans (employees share cost) typically require 75% participation to limit adverse selection.

Conversion and Continuation

When an employee leaves the group — termination, retirement, or loss of eligibility — most states require a conversion privilege. The departing member may convert to an individual permanent (whole life) policy without evidence of insurability if they apply within the conversion window (commonly 31 days).

Key conversion facts tested on the exam:

• Conversion is to an individual permanent policy, not to another term policy.
• The premium is based on the insured's attained age at conversion.
• During the 31-day conversion period, the group coverage continues — so if the employee dies during that window, the group death benefit is still payable even if conversion was not yet completed.

Taxation of Group Life Insurance

Under IRC Section 79, premiums an employer pays for group term life are a deductible business expense for the employer. For the employee, the cost of the first $50,000 of employer-provided coverage is a tax-free fringe benefit.

The trap: coverage above $50,000 creates imputed income to the employee. The cost of the excess coverage — calculated using the IRS Table I uniform-premium rates (based on the employee's age) — is added to the employee's taxable W-2 wages. The actual premium the employer pays is irrelevant; the Table I rate governs the imputed amount.

As always, the death benefit paid to the beneficiary remains income-tax-free, regardless of the coverage amount.

Section 79 — Imputed Income Example

So an employee with $130,000 of group term life reports imputed income on $80,000 of coverage, valued by the age-based Table I rate. The employee pays income tax on that imputed amount even though no cash changed hands.

Dependent Coverage, Contributory Cost, and Beneficiaries

Group plans often allow employees to add small amounts of dependent life coverage (spouse and children). Dependent coverage up to $2,000 is generally treated as a de minimis fringe benefit and is not imputed income. If the employee contributes part of the premium for their own coverage, those after-tax employee contributions reduce the imputed income that would otherwise apply to coverage above $50,000.

A final point: the employer cannot be the beneficiary of basic group term life on an employee — that arrangement would be employer-owned life insurance with separate rules. The employee names a personal beneficiary. On a covered employee's death the beneficiary receives the certificate face amount income-tax-free, and any conversion or portability rights end once a claim is paid.

Assignment, Settlement, and the Group's Tax Mechanics

Group life is almost always annually renewable term with no cash value, so there are no nonforfeiture options and the employee cannot borrow against the certificate. Coverage is typically non-contributory (employer pays all) requiring 100% participation, or contributory (employee shares cost) requiring at least 75% participation to limit adverse selection.

The $50,000 Threshold and Conversion Timing

Under IRC Section 79, employer-paid group term coverage up to $50,000 is a tax-free benefit; the cost of coverage above $50,000 creates imputed income to the employee, valued using the IRS Table I rates by age, not the employer's actual premium. On termination the employee has a 31-day window to convert to an individual permanent (not term) policy without evidence of insurability, at the insurer's individual rates. Missing the 31-day window forfeits the guaranteed-conversion right.