8.3 Group Life Insurance Underwriting and Conversion Rights
Key Takeaways
- Group life uses one master contract held by the employer, with certificates of insurance given to employees; the certificate is a summary, not the policy.
- A valid group must exist for a purpose other than buying insurance, and underwriting evaluates the group rather than individual health.
- Noncontributory plans (employer pays all) require 100% participation; contributory plans typically require 75% to control adverse selection.
- Under IRC Section 79 the first $50,000 of employer-paid group term life is tax-free; coverage above $50,000 creates imputed income valued by IRS Table I.
- The conversion privilege lets a terminating employee convert to an individual whole life policy with no evidence of insurability, usually within 31 days, at attained-age rates.
How Group Life Differs from Individual Life
Group life insurance covers many people under one contract. The insurer issues a master contract (master policy) to the group sponsor - usually an employer - and each covered employee receives a certificate of insurance summarizing their coverage. The certificate is not the policy; the employer holds the actual contract.
| Feature | Group | Individual |
|---|---|---|
| Contract holder | Employer / sponsor | The insured |
| Underwriting | Group as a whole | Each applicant |
| Document | Master policy + certificates | Individual policy |
| Premium | Often shared employer/employee | Paid by owner |
| Portability | Limited (conversion right) | Fully portable |
Most group life is group term - pure protection, no cash value, coverage often set at 1x to 3x salary.
Exam tip: A valid group must exist for a purpose other than obtaining insurance (insurance is incidental). This blocks fake groups formed only to buy coverage.
Group Underwriting Principles
Group underwriting evaluates the group, not each member's health. Underwriters look at group size, industry, average age, and the steady flow of new members that keeps the risk pool fresh. Two contribution structures drive participation rules:
| Plan type | Who pays | Minimum participation |
|---|---|---|
| Noncontributory | Employer pays 100% | 100% of eligible employees |
| Contributory | Employee shares cost | Typically 75% of eligible employees |
High participation prevents adverse selection because healthy and unhealthy members are both enrolled. Benefit amounts are set by a formula (e.g., 2x salary), removing individual selection of amount.
IRC Section 79 Tax Rule (Worked Example)
Under Internal Revenue Code (IRC) Section 79, the cost of the first $50,000 of employer-paid group term life is tax-free to the employee. Coverage above $50,000 creates imputed income taxed using IRS Table I rates.
Example: An employer provides $130,000 of group term life to a 45-year-old employee. The taxable excess is $130,000 - $50,000 = $80,000 (80 units of $1,000). At a Table I rate of $0.15 per $1,000 per month: 80 x $0.15 = $12.00/month = $144 of imputed income per year added to the employee's W-2.
Conversion Rights on Termination
When group coverage ends (the employee leaves, is laid off, or the plan terminates), the employee usually has a conversion privilege: the right to convert group term coverage to an individual whole life policy without evidence of insurability (no medical exam).
| Conversion rule | Detail |
|---|---|
| Window to apply | Typically 31 days after coverage ends |
| New policy type | An individual permanent (whole life) policy, NOT term |
| Evidence of insurability | Not required within the conversion window |
| Premium | At the insurer's standard rate for the insured's attained age |
| Death during window | Benefit is payable even if the employee dies before converting |
Trap: The converted policy is whole life at attained-age rates - usually more expensive than the group term. Conversion guarantees coverage, not a low price. You convert to an individual policy, you do not keep the group term.
Scenario: An employee leaves on March 1 with $75,000 of group term life. He has 31 days (until about April 1) to convert to an individual whole life policy with no medical questions, paying the standard rate for his current age. If he dies March 20 without yet converting, the group insurer still pays the $75,000 because death occurred within the conversion period.
Eligible Groups, Experience Rating, and Continuation
Not every collection of people qualifies. The exam recognizes several eligible group types:
- Single-employer groups - the most common; coverage tied to active employment.
- Multiple-employer trusts (METs) and multiple-employer welfare arrangements (MEWAs) - pool small employers.
- Labor union (Taft-Hartley) groups and association/professional groups that exist for a common purpose.
- Creditor groups - a lender insures debtors' lives up to the loan balance.
Experience vs. Community Rating
| Rating method | How premium is set | Typical use |
|---|---|---|
| Experience rating | Premium reflects the group's own claims history | Larger groups |
| Community rating | Premium reflects a pooled average across many groups | Small groups |
A large employer with favorable claims earns lower renewal premiums under experience rating; small groups are protected by community rating so one bad year does not spike their cost.
Continuation, Portability, and Accelerated Benefits
Beyond the 31-day conversion right, group certificates often include an accelerated death benefit rider letting a terminally ill insured draw part of the face amount early. Some plans add portability, allowing a departing employee to continue group term at group rates for a time - distinct from conversion to individual whole life.
Trap: Do not confuse the federal COBRA continuation rules (which apply to group health, not group life) with the group life conversion privilege. Group life relies on conversion or plan-specific portability, not COBRA.
An employer provides $90,000 of group term life to a 50-year-old employee. Under IRC Section 79, how much of the coverage creates imputed income?
A terminated employee exercises the group life conversion privilege within the allowed period. The converted coverage will be:
Group Underwriting Principles
Group life uses group underwriting — the group as a whole is evaluated, not each individual, so most members receive coverage without evidence of insurability up to a guaranteed-issue limit. The group must exist for a reason other than obtaining insurance, participation requirements apply (typically 75% for contributory and 100% for noncontributory plans), and a single master policy is issued to the employer while members receive certificates. Adverse selection is controlled by requiring real groups and participation minimums.
The 31-Day Conversion Privilege
When group coverage ends (termination, leaving employment), the insured generally has a 31-day conversion period to convert to an individual whole life policy without evidence of insurability at attained-age rates. The insured who dies during the 31-day window is covered even if conversion was not yet completed. Conversion is to permanent coverage, not term, and the premium reflects the insured's current age. This 31-day rule is one of the most tested group-life numbers.
An employee leaves a job with $50,000 of group term life coverage. Under the conversion privilege, she may: