8.3 Group Life Insurance

Group Life Insurance Fundamentals

Group life insurance covers many people under a single master contract issued to a sponsor (usually an employer). Individual members receive a certificate of insurance, not a policy: the employer (the policyowner) holds the master contract. Group coverage is the dominant form of employer-provided life insurance and is heavily tested.

Key Characteristics

• Coverage is most often annually renewable group term life with no cash value.
• Underwriting is on the group as a whole, not the individual; healthy and unhealthy members are pooled. Small groups may require evidence of insurability above a guaranteed-issue limit.
• The benefit amount is set by a nondiscriminatory formula (such as a flat amount, a multiple of salary, or by class) so that producers cannot select against the insurer.
• Cost is low because of mass marketing, employer administration, and group underwriting.

Eligibility and Groups

To prevent adverse selection, the group must exist for a reason other than buying insurance. Eligible groups include single-employer groups, multiple-employer trusts (METs), labor unions, trade associations, and creditor-debtor groups (group credit life). A minimum participation percentage is required when employees contribute to the premium (a contributory plan); noncontributory plans must enroll 100%.

Why Group Coverage Costs Less

Group pricing is built on the law of large numbers. With hundreds of insured lives, the insurer can predict mortality accurately and skip the costly individual underwriting that drives up individual-policy expense. The sponsor handles enrollment and premium collection through payroll, so marketing and administrative loads shrink. The result is coverage at rates an individual could rarely obtain alone, especially for employees who would otherwise be rated or declined. The trade-off is that the coverage is term, owned by the employer, and lost when the member leaves, which is exactly why the conversion privilege matters.

Conversion and Continuation

A defining group feature is the conversion privilege. When a member leaves the group (termination of employment or eligibility), they may convert their group term coverage to an individual permanent (whole life) policy without evidence of insurability, typically within 31 days of termination. The premium is based on the insured's attained age and the insurer's standard rates.

During the 31-day conversion period, the member is covered even if they have not yet applied. If they die in that window, the group death benefit is paid. Note the member generally cannot convert to term; conversion is to a permanent individual policy.

Contributory plans require the employee to pay part of the premium; noncontributory plans are fully employer-paid and must cover all eligible employees to avoid adverse selection.

Federal Taxation of Group Term Life (Section 79)

Under IRC Section 79, employer-paid group term life premiums are a deductible business expense for the employer and are not taxable income to the employee for the first $50,000 of coverage.

For coverage above $50,000, the employee must report imputed income: the cost of the excess coverage based on the IRS Table I uniform premium rates (which rise with age), reduced by any premium the employee pays.

Worked example. An employer provides $130,000 of group term life. The first $50,000 is tax-free. The employee has imputed income on the remaining $80,000, computed using the age-based Table I monthly rate per $1,000. If the Table I rate is $0.23 per $1,000 per month at the employee's age: $80,000 / $1,000 × $0.23 × 12 = $220.80 of taxable imputed income per year.

Exam Traps

• The employee receives a certificate, not a policy; the employer holds the master contract.
• The first $50,000 of employer-paid group term is tax-free; the excess is imputed income via Table I.
• Conversion is to an individual permanent policy at attained age, within 31 days, with no evidence of insurability.
• Group underwriting looks at the group's composition, not each member's health.

Dependent Coverage and Accidental Death

Many group plans let employees add modest amounts of dependent life coverage on a spouse and children, often as a flat benefit. They may also include an accidental death and dismemberment (AD&D) rider that pays an additional benefit (the principal sum) for accidental death and scheduled amounts for the loss of limbs or sight. These add-ons are underwritten on the same group basis and follow the master contract. For tax purposes, employer-paid dependent coverage above a small de minimis amount can also create imputed income, mirroring the Section 79 logic that applies to the employee's own coverage above $50,000.

Group Permanent and Retired-Lives Reserves

While most group life is term, some employers offer group permanent or group universal coverage so employees can build cash value and keep protection into retirement. Employers funding post-retirement death benefits may set aside a retired-lives reserve, a fund that pre-pays the cost of continuing group term coverage for retirees. These arrangements are tested lightly, but you should recognize that group coverage is not exclusively term and that continuation into retirement can be pre-funded.