8.3 Group Life Insurance
Key Takeaways
- Group life uses a master contract held by the employer; insureds receive certificates of coverage, not individual policies.
- The dominant form is annually renewable group term life, written without individual evidence of insurability up to the guaranteed-issue limit.
- Under IRC 79, the cost of employer-paid group term life over $50,000 is imputed taxable income to the employee.
- Departing employees have a conversion privilege to an individual permanent policy without proving insurability, typically within 31 days.
- Eligibility requires a bona fide group formed for a purpose other than buying insurance, with participation thresholds to prevent adverse selection.
Group Life Insurance
Group life insurance covers many people under a single master contract issued to the group sponsor — usually an employer. The employer is the policyowner; covered employees are insureds who receive a certificate of insurance, not an individual policy.
Group Underwriting and Eligibility
Group insurance relies on group (experience) underwriting: the insurer evaluates the characteristics of the whole group rather than each individual. Within the guaranteed-issue limit, members are covered without evidence of insurability — a major advantage for the uninsurable.
To qualify, a group must meet these tests:
- Bona fide purpose: the group must exist for a reason other than obtaining insurance (e.g., an employer, union, or association).
- Flow of members: new members continually enter, spreading risk over time.
- Participation thresholds: contributory plans typically require 75% participation; noncontributory (employer-pays-all) plans require 100%.
| Plan Type | Who Pays | Participation Required |
|---|---|---|
| Noncontributory | Employer pays 100% | 100% of eligible employees |
| Contributory | Employer and employee share | Usually 75% |
Why participation rules exist: They prevent adverse selection — if only sick employees enrolled, claims would overwhelm premiums.
Cost Advantages of Group Coverage
Group life is typically cheaper than comparable individual coverage for several reasons: there is little or no individual underwriting, administrative costs are spread across many certificate holders, and the employer often shares or pays the premium. Premiums are usually experience-rated — the insurer adjusts the group's rate based on the claims history of that specific group — and one master policy serves the entire roster, eliminating per-policy issue costs.
The trade-off is that the individual has no ownership rights in the master contract, cannot choose the carrier, and generally loses coverage when employment ends (subject to the conversion privilege described below).
Types of Group Life Plans
The overwhelmingly dominant form is group term life, usually annually renewable term with no cash value. Coverage is often set as a multiple of salary (e.g., 1× or 2× annual pay).
- Group term life: pure death protection, renewed annually, low cost.
- Group permanent (whole/universal): builds cash value; far less common because of cost.
- Group credit life: covers a debtor's outstanding loan balance, with the lender as beneficiary; the benefit declines as the loan is paid down.
- Dependent group life: small amounts on a spouse and children, often a flat sum.
Conversion Privilege
When an employee leaves or coverage terminates, the conversion privilege lets them convert group coverage to an individual permanent policy without evidence of insurability, typically within 31 days. The premium is based on attained age and standard rates.
- If the employee dies during the 31-day conversion period, the group death benefit is payable even if they never applied to convert.
- Conversion is to a permanent plan (not term), and the converted amount usually cannot exceed the group coverage lost.
Exam trap: Conversion does not require proof of insurability, but it does NOT let the worker keep the cheap group term rate — the new individual permanent premium is based on attained age.
An employee covered under a noncontributory group term life plan terminates employment. Which statement is TRUE regarding the conversion privilege?
An employee age 45 has $200,000 of employer-paid group term life insurance. Under IRC Section 79, how much of this coverage generates imputed taxable income?
Taxation of Group Life — IRC Section 79
Employer-paid group term life is a tax-favored fringe benefit, but only up to a limit. Under IRC Section 79:
- The cost of the first $50,000 of employer-paid group term coverage is tax-free to the employee.
- Coverage above $50,000 generates imputed income — the employee is taxed on the cost of the excess, computed from the IRS Uniform Premium (Table I) rates by age, less any amount the employee contributed.
- Employer premiums are generally a deductible business expense.
- The death benefit paid to the beneficiary remains income tax-free under IRC 101(a), regardless of the $50,000 rule.
Worked example (imputed income):
- Employee age 45 has $150,000 of employer-paid group term coverage.
- Excess over $50,000 = $100,000 → 10 units of $1,000.
- Table I rate at age 45 = $0.15 per $1,000 per month.
- Monthly imputed cost = 10 × $0.15 = $1.50 → $18/year added to taxable W-2 wages.
If the employee contributes toward the coverage with after-tax dollars, those contributions reduce the imputed income dollar-for-dollar. Coverage of $50,000 or less that is fully employer-paid produces no imputed income at all.
Exam trap: Only the cost of the excess coverage is imputed income — not the face amount. The death benefit itself is always income-tax-free.