8.3 Group Life Insurance Underwriting and Conversion Rights

How Group Life Is Structured

Group life insurance covers many people under a single contract. The insurer issues a master contract (master policy) to the group sponsor (usually the employer); each insured member receives a certificate of insurance summarizing — but not constituting — the coverage.

Exam tip: The certificate is NOT the policy. The employer/sponsor is the policyowner; the insured employee is the certificate holder.

A foundational rule: the group must exist for a purpose other than obtaining insurance (an employer, a trade association, a labor union). "Insurance-only" groups are not eligible.

Group Underwriting and Participation

Group underwriting evaluates the group's characteristics, not each member's health: group size, industry, average age, income, location, persistency, and plan design. Because coverage is set by formula (e.g., 1x-3x salary, by class, or a flat amount), members cannot self-select amounts based on their own health — the key adverse-selection control.

Participation requirements also fight adverse selection:

Large groups are experience-rated (premiums adjust to the group's own claims); small groups rely more on manual/community rates because their experience lacks statistical credibility. An active-at-work provision requires the member to be working on the effective date, postponing coverage for someone already disabled.

Group Term Tax Treatment: IRC Section 79

Most employer plans use group term life. Under Internal Revenue Code (IRC) Section 79, the cost of the first $50,000 of employer-paid group term is tax-free to the employee. The employer's cost for coverage above $50,000 is imputed income — added to the employee's taxable wages using the IRS Table I monthly cost per $1,000.

Selected Table I monthly rates per $1,000:

Imputed income is reduced (but not below zero) by any after-tax premiums the employee pays toward the coverage.

Section 79 Imputed Income: Worked Example

Facts: Employee is age 47; employer provides $150,000 of group term, fully employer-paid.

1. Subtract the exclusion: $150,000 - $50,000 = $100,000 of taxable coverage.
2. Convert to thousands: $100,000 / $1,000 = 100 units.
3. Apply the age-47 Table I rate ($0.15 per $1,000/month): 100 × $0.15 = $15.00 per month.
4. Annualize: $15.00 × 12 = $180.00 of imputed income added to W-2 wages for the year.

If the employee paid, say, $40 of after-tax premium that year, imputed income would drop to $180 - $40 = $140.

Exam trap: The $50,000 exclusion applies only to employer-paid group term. Individually owned policies and purely employee-paid voluntary coverage are not subject to Section 79 imputed income. Group variable life is a security and requires a prospectus and a securities license (Series 6 or 7) to sell.

Eligibility, Enrollment, and Evidence of Insurability

Sponsors define eligible classes on employment-related grounds (full-time, salary band, job category) — never on health. New members serve an eligibility waiting period (often the first of the month after 30-90 days) before coverage.

Enrollment windows:

• Initial enrollment — when first eligible; coverage up to the guaranteed issue limit needs no medical evidence if elected within the window (often 31 days).
• Open enrollment — annual change period.
• Qualifying life event — marriage, birth/adoption, divorce, or loss of other coverage permits a special change.

Evidence of insurability (EOI) — medical proof — is required for amounts above the guaranteed issue limit, for late enrollees who missed the initial window, and for certain coverage increases. EOI is the group analog of individual underwriting and exists to stop adverse selection by latecomers.

Conversion Privilege vs. Portability

When a member leaves, group coverage normally ends, but two continuation rights may apply.

Conversion privilege: the member converts group term to an individual permanent (whole life) policy without evidence of insurability, generally within 31 days of losing coverage. Premiums are at the insurer's attained-age individual rate (higher than group), and the convertible amount is capped at the group amount lost.

• Death during the 31-day conversion period: the group policy pays the death benefit even if the member never applied to convert. This protects members in transition.
• Plan termination: conversion is usually limited if the whole plan ends and the member had coverage for a set minimum period.

Portability: some plans let the member keep the same term coverage at group rates, paying the insurer directly. Portability is not the same as conversion; a member who ports generally cannot later convert.

Exam trap: COBRA continues health, dental, and vision — NOT life insurance. Electing COBRA does not extend the 31-day life-conversion clock, which still runs from termination. Covered dependents (and an ex-spouse after divorce) may also have separate conversion rights.