8.3 Group Life Insurance
Key Takeaways
- Group life uses a master contract held by the employer; employees receive certificates, not policies.
- It is typically annual renewable term with no cash value and group-basis underwriting.
- Participation minimums (75% contributory, 100% non-contributory) control adverse selection.
- Departing employees can convert to an individual permanent policy within 31 days with no evidence of insurability.
- IRC Section 79 makes the cost of the first $50,000 of employer-paid coverage tax-free; excess creates Table I imputed income.
Group Life Insurance
Group life insurance covers many people under a single master contract issued to a sponsor — usually an employer. Individuals receive a certificate of insurance, not a policy. The exam emphasizes who holds the contract, how underwriting differs, and the unique Section 79 tax rule for employer-paid coverage.
Structure and Characteristics
- The master policy is issued to the employer (policyowner); employees are the insureds.
- Coverage is almost always annually renewable term, so it builds no cash value.
- Underwriting is on the group as a whole — individual evidence of insurability is usually not required up to a guarantee-issue limit.
- Premiums are lower per dollar of coverage than individual insurance due to economies of scale and lower administrative cost.
| Feature | Group Life | Individual Life |
|---|---|---|
| Contract holder | Employer (master policy) | The insured |
| Underwriting | Group basis, often no medical | Individual, medical exam common |
| Cost per unit | Lower | Higher |
| Cash value | None (term) | Often present |
| Portability | Conversion privilege | Owned outright |
Eligibility & participation: To prevent adverse selection, insurers require a minimum participation percentage — typically 75% when employees contribute (contributory) and 100% when the employer pays the full cost (non-contributory). Coverage often uses a benefit schedule (e.g., 2× salary) so employees cannot select against the plan.
Eligible Groups and Plan Sponsors
Not every collection of people qualifies as an insurable group. The group must have been formed for a purpose other than buying insurance. Tested eligible groups include:
- Employer-employee groups — the most common; single-employer or multiple-employer trusts (METs).
- Labor unions — coverage for members.
- Trade and professional associations — must meet minimum size and existence requirements.
- Creditor-debtor groups — group credit life, where the creditor is beneficiary up to the loan balance and coverage decreases as the debt is repaid.
Trap: Group credit life names the lender as beneficiary only to the extent of the outstanding debt; any excess goes to the borrower's named beneficiary, and coverage cannot exceed the loan amount.
In a contributory group life plan, what is the typical minimum participation requirement, and why does it exist?
Conversion Privilege
When employment ends, the employee may convert group coverage to an individual whole life policy without evidence of insurability. Key rules:
- Conversion is to an individual permanent policy, NOT term, and not the same group plan.
- The application must be made within the conversion period — usually 31 days after coverage ends.
- The premium is based on the insured's attained age and standard rates.
- During the 31-day window, the employee remains covered even before converting.
Taxation of Group Life — Section 79
Employer-paid group term life enjoys a major 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. Premiums for coverage above $50,000 create imputed income taxed to the employee using the IRS Table I uniform-premium rates (based on age).
| Coverage Amount | Employee Tax Treatment |
|---|---|
| First $50,000 | Premium cost is tax-free |
| Above $50,000 | Imputed income per IRS Table I |
| Employer's premium deduction | Deductible as a business expense |
Worked example: An employer provides $130,000 of group term life. The first $50,000 is tax-free; the cost of the remaining $80,000 is imputed income to the employee, computed from the Table I rate for the employee's age bracket. The death benefit itself remains income tax-free to the beneficiary.
Continuation, Conversion, and Portability Compared
When group coverage ends, three different pathways may apply, and the exam tests the distinctions:
| Option | What It Does | Evidence of Insurability |
|---|---|---|
| Conversion | Switch to an individual permanent policy within 31 days | None required |
| Continuation | Keep group coverage temporarily (some plans) | None |
| Portability | Carry group term coverage at group rates after leaving | Sometimes required |
Death during conversion period: If the former employee dies within the 31-day conversion window — even without having applied — the group insurer pays the death benefit as if conversion had occurred. This protects the family during the transition and is a frequently tested point.
Employer Deductibility and Discrimination
Employer premiums for group term life are a deductible business expense. However, if a plan discriminates in favor of key employees (officers/owners), those key employees lose the $50,000 exclusion and must include the full cost of their coverage in income — a penalty designed to keep plans broad-based.
Under IRC Section 79, an employee receives $90,000 of employer-paid group term life insurance. How is this taxed to the employee during their working years?
Worked Example: Section 79 Imputed Income
Employer-paid group term life is tax-free to the employee on the first $50,000 of coverage. Above that, the cost of excess coverage (per the IRS Table I rate) is imputed income taxed to the employee. If an employee has $130,000 of employer-paid coverage, the cost of the $80,000 above the $50,000 threshold is added to taxable wages.
Trap: the $50,000 exclusion applies only to employer-paid group term. Employee-paid contributions and any permanent group coverage are treated differently, and the conversion privilege lets a departing employee convert to an individual policy without evidence of insurability.
Conversion Without Evidence of Insurability
When group life coverage ends (job loss, plan termination), the insured generally has 31 days to convert to an individual permanent policy without evidence of insurability, at the insured's attained-age individual rate. There is no requirement to convert to the same amount, but the converted policy cannot be term — it must be a permanent form the insurer offers.
Trap: conversion is a right to buy an individual policy, not to keep the group rate; premiums rise because they are now based on the insured's age and individual underwriting class. If the entire group plan terminates, conversion rights may be limited compared with an individual leaving an ongoing plan.