5.3 Group Life Insurance and Conversion

Group life is sold to an entity (employer, association, union) that insures its members. The exam loves the distinctions between the master contract, certificates, and conversion rights.

Master Contract and Certificates

• The master contract (master policy) is issued to the group sponsor (e.g., the employer), who is the policy owner.
• Individual members receive a certificate of coverage — proof of insurance and a summary of benefits — not an individual policy.
• Underwriting is done on the group as a whole, so individual members usually need no evidence of insurability up to a guaranteed-issue limit.

Contributory vs. Noncontributory

The high participation thresholds exist to prevent adverse selection — if only unhealthy people enrolled, claims would spike. Requiring most of the group to join spreads risk.

Most group life is annually renewable term (ART) with no cash value; coverage is often a flat amount or a multiple of salary.

Eligibility and Enrollment

To be covered, a person must:

1. Belong to an eligible class (e.g., full-time employees, not contractors).
2. Satisfy any probationary/waiting period (a set time after hire).
3. Meet the actively-at-work provision — coverage begins only if the employee is actively working, not out sick, on the effective date.
4. Enroll during the eligibility/enrollment period; late enrollees may face evidence of insurability.

Trap: The actively-at-work rule can delay an employee's effective date even though the group plan is already in force.

Permitted Group Types and Antidiscrimination

State law and the exam recognize several legitimate group types: single-employer, multiple-employer trust (MET), labor union, trade association, and creditor-debtor groups. The group must form for a purpose other than obtaining insurance to prevent abuse.

Within a group, benefits are set by a nondiscriminatory formula — a flat amount, a multiple of salary, or by class (e.g., management vs. staff). The employer cannot single out individuals for more or less coverage based on health. This formula approach is what keeps group underwriting at the group level and avoids individual selection.

Group vs. Individual: Quick Compare

Group coverage is cheaper per $1,000 because expenses are spread and selection is minimized, but it is tied to membership — leave the group and the coverage ends unless converted.

The Conversion Privilege

When a member leaves the group (termination, layoff, end of eligibility), the conversion privilege lets them convert their group term coverage to an individual permanent (whole life) policy.

Key rules tested:

• No evidence of insurability is required — health is irrelevant to converting.
• The member generally has 31 days to convert after coverage ends.
• Premiums are at the insurer's standard rate for the member's attained age and class — usually higher than the group rate.
• Conversion is to an individual whole life policy, not term (a frequent distractor).

If the member dies during the 31-day conversion period without converting, the group death benefit is still payable (the conversion window doubles as a grace for the benefit).

Taxation: The Section 79 $50,000 Rule

For employer-provided group term life, IRC Section 79 sets the key tax line:

• The cost of the first $50,000 of employer-paid coverage is a tax-free benefit to the employee.
• The cost of coverage above $50,000 is imputed income — the employee is taxed on the IRS Table I cost of the excess, not on the death benefit.
• Employer premiums are deductible as a business expense (when the employer is not the beneficiary).
• The death benefit paid to a named beneficiary is generally income-tax-free, as with other life insurance.

Worked example: An employer provides $130,000 of group term life. The employee pays no tax on the cost of the first $50,000; the Table I cost of the remaining $80,000 is added to the employee's W-2 as imputed income. The eventual death benefit remains income-tax-free.

The 31-day conversion window and no evidence of insurability

When group life coverage ends (the employee leaves, the group terminates, or eligibility lapses), the insured has a 31-day conversion period to convert to an individual permanent (whole life) policy without evidence of insurability. The new premium is based on the insured's attained age and standard rates, and the converted policy is whole life, not term. Critically, if the insured dies during the 31-day window — even before applying — the group death benefit is still payable, because the conversion right keeps coverage alive during the window.

Conversion when the whole group plan ends

If the entire group plan terminates (not just one person's eligibility), conversion rights may be limited — typically capped and available only to those covered for a minimum period (often 5 years) — to prevent the insurer from being adversely selected by the least healthy members of a dissolving group.

Continuation during disability

Group term often includes a waiver of premium or extended death benefit if the employee becomes totally disabled while covered.