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. Employees receive a certificate of coverage, not an individual policy. Because the group is underwritten as a unit, individual employees typically join with little or no evidence of insurability during the initial eligibility window.

Characteristics of Group Insurance

• Master policy / certificates. The employer holds the contract; employees hold certificates summarizing benefits.
• Group underwriting. The insurer evaluates the group as a whole (age distribution, industry, size), not each individual. This spreads risk and keeps cost low.
• Experience vs community rating. Large groups are usually experience-rated (priced on the group's own claims history); small groups are community-rated.
• Adverse selection control. To prevent only sick people from enrolling, plans require minimum participation: typically 100% participation for non-contributory plans (employer pays all) and at least 75% for contributory plans (employees share cost).
• Annually renewable term (ART). Most group life is one-year renewable term with no cash value; coverage is temporary and tied to employment.
• Eligibility and probationary period. Plans define eligible classes (e.g., full-time employees) and may impose a probationary period (often 30-90 days) before new hires can enroll, followed by an enrollment period during which no evidence of insurability is required.
• Benefit schedules. Coverage amounts are set by a nondiscriminatory schedule (a flat amount, a multiple of salary, or by employee class) rather than chosen individually, which prevents healthier or wealthier employees from over-insuring.

Types of Group Plans

Conversion Privilege

When an employee leaves the group (termination or end of eligibility), the conversion privilege lets them convert group coverage to an individual permanent (whole life) policy without evidence of insurability. Exam-critical rules:

• The employee generally has 31 days to convert.
• Conversion is to an individual permanent policy at the insured's attained age rate — not to another term policy at group rates.
• If the entire group plan terminates, conversion is usually limited and may be capped (e.g., to a maximum face amount).
• If the insured dies during the 31-day conversion period, the group death benefit is payable even if conversion was not completed.

Federal Tax Treatment — IRC Section 79

Employer-paid group term life is a tax-favored benefit, but only up to a limit:

• Premiums for the first $50,000 of employer-provided group term coverage are not taxable income to the employee.
• Coverage above $50,000 creates imputed income — the employee is taxed on the cost of the excess using the IRS Table I rates (based on age), not the actual premium.
• Employer premiums are a deductible business expense.
• The death benefit remains income-tax-free to the beneficiary regardless of the $50,000 rule.

Worked Imputed-Income Example

Maria, age 45, has $130,000 of employer-paid group term life. Only the cost of coverage above $50,000 is imputed: $130,000 − $50,000 = $80,000 of taxable coverage. The IRS Table I rate at her age band is multiplied by the $80,000 (in thousands) to produce the imputed income added to her W-2. The first $50,000 stays completely tax-free. Note the imputed amount uses the Table I uniform cost, not the employer's actual premium, so younger employees see very little imputed income even with large coverage.

Continuation, Portability, and Dependent Coverage

Some group plans add portability (carry the group term coverage at group rates after leaving) as an alternative to conversion, but portability is not guaranteed by law the way the 31-day conversion right is. Group plans may also offer dependent life coverage (a small amount on a spouse and children) and accidental death & dismemberment (AD&D) riders. Dependent coverage and AD&D follow the same master-contract structure and certificate model.

Group vs Individual: Key Contrasts

Federal Requirements Affecting Group Plans

Group health and welfare benefits are shaped by several federal laws the national exam expects you to recognize by name:

• ERISA sets fiduciary, reporting, and disclosure standards for employer-sponsored plans and requires a summary plan description (SPD) to participants.
• Section 79 governs the $50,000 group term life tax exclusion described above.
• ADEA and the age-discrimination rules limit how benefits can be reduced for older workers; reductions must follow a justified cost basis.

Why Group Coverage Is Not Enough Alone

Because group term life is usually a flat amount or a small salary multiple and ends at employment termination, producers position it as a foundation, not a complete plan.

A worked needs comparison shows the gap: an employee earning $60,000 with a 2x-salary group benefit has $120,000 of coverage, but a human-life-value or needs analysis often shows a need several times larger once income replacement, debts, and final expenses are summed. The conversion privilege protects continuity, but at attained-age permanent rates far higher than the group cost — so layering an individual policy while young and healthy is the standard recommendation.