5.3 Group Life Insurance and Conversion
Key Takeaways
- Group life uses a single master contract owned by the sponsor; insured members hold certificates, and most coverage is annually renewable group term.
- Underwriting looks at the whole group; noncontributory plans require 100% participation while contributory plans typically require about 75%.
- The conversion privilege lets a departing employee convert group term to individual whole life at attained-age rates with no evidence of insurability, usually within 31 days.
- A death during the 31-day conversion period before converting is covered: the group term amount is paid as if conversion occurred.
- The first $50,000 of employer-provided group term is income-tax-free to the employee; the employer's cost above $50,000 is imputed taxable income under IRS Table I.
Group life insurance
Group life insurance covers many people — typically employees — under a single master contract issued to a sponsor (the employer, union, or association). Individuals receive a certificate of insurance as evidence of coverage, not an individual policy. The vast majority of group life is annually renewable group term.
Master contract vs. certificate
- The policyowner is the group sponsor (employer), which holds the master contract.
- The insured employees are certificate holders; the certificate summarizes coverage, conversion rights, and how to file a claim.
- The group must be a legitimate group formed for a purpose other than obtaining insurance (employer-employee, labor union, trade association) to prevent adverse selection.
Trap: The employee does not own the contract and cannot unilaterally change its terms; the employer controls the master policy.
Underwriting the group, not the individual
Group underwriting evaluates the group as a whole — its size, industry, age distribution, and prior claims — not each member individually. Key controls:
- Eligibility / probationary period: a waiting period (e.g., 30–90 days) before a new hire is covered.
- Actively-at-work provision: the employee must be actively working on the effective date for coverage to begin.
- Participation requirements: for noncontributory plans (employer pays 100%), 100% of eligible employees must participate; for contributory plans (employees share cost), insurers commonly require about 75% participation to limit adverse selection.
| Plan type | Who pays | Typical participation rule |
|---|---|---|
| Noncontributory | Employer pays full premium | 100% of eligible employees |
| Contributory | Employee shares premium | ~75% of eligible employees |
An employer offers a contributory group life plan. What participation level do insurers typically require, and why?
The conversion privilege
When an employee leaves the group (termination, layoff, or end of eligibility), the conversion privilege lets them convert their group term certificate to an individual permanent (whole life) policy without proving insurability.
Core rules tested:
- Conversion is to an individual whole life policy, not to another term policy, and not at the same group rate.
- Premium is based on the insured's attained age at conversion (individual rates), so it is higher than the group rate.
- No evidence of insurability is required — this is the protection for a now-uninsurable employee.
- The employee generally has 31 days (the conversion period) to apply and pay the first premium.
- A death during the conversion period is covered: if the employee dies within the 31 days before converting, the group term amount is paid as if conversion had occurred.
Worked scenario — conversion timing
Maria's employment ends on June 1. Her group certificate provides $50,000 of term coverage and a 31-day conversion window.
- She has until July 2 to convert to an individual whole life policy at her attained age, with no medical exam.
- If she dies on June 20 (within the window) without having applied, the insurer still pays the $50,000 group death benefit — the conversion-period death rule protects the beneficiary.
- If she dies on July 15 (after the window) having never converted, no benefit is payable; coverage lapsed when the window closed.
Trap: Students confuse the conversion period (31 days) with the policy's grace period; the conversion window is the time to act, and a death inside it is covered.
An employee leaves her job and her group term certificate includes a 31-day conversion privilege. She dies 12 days later without having converted. What is payable?
Taxation snapshot (federal, national content)
- Employer-paid group term premiums are a deductible business expense for the employer.
- For the employee, the cost of the first $50,000 of employer-provided group term life is income-tax-free. The employer's cost for coverage above $50,000 is imputed income (taxable to the employee, valued under the IRS Table I rates).
Conversion Mechanics and Common Group Designs
The conversion privilege lets a departing employee convert group term to an individual permanent (whole life) policy — not to individual term — without proving insurability. The new premium is based on the insured's attained age and standard class. The application and first premium are generally due within the 31-day conversion period, during which the group coverage continues so a death during the window is still paid.
If the entire group plan terminates (the employer drops it), conversion rights are usually limited to employees insured for a minimum period (often five years) and capped at a stated amount.
| Group life design | Defining feature |
|---|---|
| Group term life | Annually renewable term; most common employer benefit |
| Group permanent | Builds cash value; rarer, used for executives |
| Dependent group life | Small face on spouse/children, employee is beneficiary |
| Group credit life | Decreasing term covering a loan balance |
Trap: Conversion always produces a permanent individual policy, and no medical exam is required; the higher attained-age premium — not health — is what changes. The 31-day window mirrors the individual conversion period elsewhere in the curriculum.