8.3 Group Life Insurance

Group life insurance covers many individuals under a single master contract issued to a sponsor (usually an employer). Understanding the structure, underwriting, certificate mechanics, the $50,000 tax threshold, and the conversion privilege is essential exam content.

Structure and Parties

• Master policy is issued to the group sponsor (employer, union, association) — the sponsor is the policyowner.
• Certificate of insurance is issued to each covered employee as evidence of coverage; the employee is not the policyowner.
• The dominant form is group term life — annually renewable term with no cash value.

Group underwriting differs sharply from individual underwriting. The carrier underwrites the group as a whole, not each person. This relies on the law of large numbers and requires the group to exist for a purpose other than obtaining insurance (the anti-adverse-selection rule).

Eligibility and Anti-Selection Controls

To prevent unhealthy individuals from dominating enrollment, group plans use:

Exam trap — participation percentages: Non-contributory = 100% must be covered; contributory = typically 75% minimum. Confusing these two thresholds is a classic miss.

The $50,000 Tax Rule (Section 79)

Under IRC Section 79, employer-paid group term life premiums are a tax-favored benefit, but only up to a limit:

• Premiums for the first $50,000 of employer-provided group term coverage are tax-free to the employee.
• Coverage above $50,000 creates imputed income — the cost of the excess (per the IRS Table I uniform premium rates, based on age) is added to the employee's taxable W-2 wages.
• The death benefit itself is income-tax-free to the beneficiary regardless of amount.

Worked numeric — imputed income. An employee age 45 has $150,000 of employer-paid group term life. The taxable excess coverage = $150,000 - $50,000 = $100,000. If the IRS Table I rate at age 45 is $0.15 per $1,000 per month, imputed income = ($100,000 / $1,000) x $0.15 x 12 = $180/year added to taxable wages.

Conversion Privilege

When group coverage ends (termination, leaving the group), the employee has a conversion privilege:

• Convert to an individual whole life policy (NOT term) without evidence of insurability.
• Must exercise within the conversion period — typically 31 days after group coverage ends.
• Premium is based on the insured's attained age at the standard rate.
• If the insured dies during the 31-day conversion window, the group death benefit is payable even if conversion was not yet completed.

Exam trap — conversion is to permanent, not term. The converted policy is an individual permanent/whole life policy at attained-age rates; students wrongly assume conversion produces another term policy. Also distinguish conversion (to individual coverage) from portability (continuing the group term coverage itself).

Contributory vs Non-Contributory in Depth

The participation thresholds exist to defeat adverse selection — the tendency of less healthy people to enroll and healthier people to skip optional coverage. When the employer pays the entire premium (non-contributory), everyone is automatically in, so 100% participation is achievable and the risk pool is balanced. When employees pay part of the premium (contributory), the carrier accepts a lower 75% threshold but watches enrollment closely.

Why the Group Must Have a Prior Purpose

A legitimate group must exist for a reason other than buying insurance — an employer-employee relationship, a labor union, or a trade association. This rule blocks people from forming sham associations purely to obtain group rates and stack the pool with unhealthy lives.

Group Underwriting Mechanics

Because the carrier underwrites the aggregate group, individual members usually do not submit evidence of insurability up to a guaranteed issue limit. Coverage above that limit, or late enrollment after the initial window, may trigger individual medical questions. New groups are priced using experience or community rating, and large groups can move toward experience rating based on their own claims history.

Certificate vs Master Policy

The employee holds a certificate that summarizes coverage, but the controlling legal document is the master policy held by the sponsor. If the certificate and master policy conflict, the master policy governs. The employee cannot unilaterally change beneficiary designations outside the plan's procedures, since the sponsor administers enrollment.

Continuation and Federal Overlap

When employment ends, the conversion privilege provides a guaranteed-issue path to permanent coverage, while portability (where offered) lets the employee keep the same group term coverage by paying premiums directly. These options sit alongside federal continuation rules for health benefits, but for life insurance the 31-day conversion privilege is the central exam point.

Master Contract, Conversion, and No Individual Underwriting

Group life covers many people under a single master contract held by the employer/sponsor; each insured receives a certificate of coverage, not an individual policy. Because the group is underwritten as a whole, individuals generally provide no evidence of insurability up to a guaranteed-issue limit — a key advantage over individual coverage.

When an employee leaves, the conversion privilege lets them convert group term coverage to an individual permanent policy without proving insurability, typically within 31 days of termination, at the insurer's standard rates for their attained age. During that 31-day window coverage continues even before conversion. The exam tests the 31-day conversion period, the no-individual-underwriting feature, and the master-contract/certificate distinction as the defining traits of group life.

Taxation and Group Plan Structures

Employer-paid group term life enjoys a tax break: under IRC Section 79, the cost of the first $50,000 of employer-provided group term coverage is tax-free to the employee. The imputed cost of coverage above $50,000 (using an IRS table) is taxable income to the employee — a frequently tested threshold.

Group life appears in several structures: group term (most common, no cash value), group universal life (portable, cash-value), and dependent group life (small amounts on spouses/children). Contributory plans require employee premium contributions and need 75% participation; noncontributory plans (employer pays all) require 100% participation to prevent adverse selection. The exam reliably tests the $50,000 Section 79 threshold and the participation percentages tied to contributory versus noncontributory plans.