Group Life Insurance
One contract, many lives: how employer group coverage works, who owns what, the 31-day conversion right, and the $50,000 tax rule.
Take a shot at these. Being wrong here is the point — it primes you for the answers, which are all in this lesson.
A bank arranges life insurance on its borrowers so outstanding loans are repaid if a borrower dies. This is:
Carla's employer pays the full premium on $120,000 of group term coverage for her. For tax purposes, Carla must:
Group life insurance is MOST commonly written as which type of coverage?
Group life flips the individual-insurance script: one master contract covers many people, the employer owns the policy, and nobody gets individually underwritten. The exam leans on a handful of crisp numbers — 75% vs 100% participation, the 31-day windows, the 5-year rule, the $50,000 tax threshold — and on knowing exactly which rights belong to the employer versus the employee. Nail those and this is one of the friendliest chapters on the test.
How Group Life Works: Master Policy & Certificates
[2–2.2]Group life insurance covers many people under a single contract — almost always annual renewable term — and the insured employee is never the policy owner. The employer holds the master policy and every ownership right except one: each employee (the certificate holder, who receives a certificate of insurance as evidence of coverage) names their own beneficiary. Coverage amounts come from a benefit schedule — flat amount, salary multiple, or position — so members can't select amounts against the insurer.
Which concept does this describe? The document covered employees (certificate holders) receive as evidence of coverage — it shows their benefits, duration, and beneficiary. Employees do NOT receive an individual policy.
Marta is covered under her employer's group life plan. Which right does Marta — not her employer — hold?
Contributory vs Noncontributory & Who Can Be a Group
[2.3–2.4]Two funding models, two participation floors: a contributory plan (employees share the cost) needs 75% of eligible employees enrolled, while a noncontributory plan (employer pays everything) requires 100% — automatic enrollment for all. Both floors exist to defeat adverse selection. The group itself must be a natural group — formed for some purpose other than buying insurance — and generally at least 10 members. New hires sit out a probationary period (1–6 months), then get a 31-day enrollment window; enroll late and the insurer can demand evidence of insurability.
Dan became eligible for his company's contributory group plan but didn't enroll until 4 months later. The insurer may require:
An insurer requires 75% of eligible employees to participate in a group plan. This plan must be:
Group Underwriting
[2.5]In group underwriting the insurer evaluates the group — its size, purpose, participation rate — not the individuals, so no one proves insurability and no employee can be excluded for a physical impairment. The math works because good risks offset bad ones across a large pool (the law of large numbers), and participation requirements keep healthy members in. Underwriters also weigh persistency: a group that hops insurers every year costs more to acquire than it ever pays back.
In underwriting a group life policy, the insurer evaluates:
An underwriter is hesitant to quote a group that has changed insurers three times in five years. The underwriter's concern is the group's:
The Conversion Privilege
[2.6]Every group policy includes a conversion privilege: an employee who leaves the job — quit, laid off, or terminated — has 31 days to convert group term coverage into an individual whole life policy with no proof of insurability, priced at their attained age. Crucially, the group coverage stays alive during those 31 days, so a death before converting is paid by the group policy. If the master policy itself terminates, only members with 5+ consecutive years of coverage may convert, up to the insurer's cap.
An employer terminates its group master policy. Which employee may convert to an individual policy?
Priya quits her job on June 1. Under the conversion privilege she may convert her group coverage to:
Other Group Forms & Federal Programs
[3]Beyond employer plans: group credit life (banks insuring borrowers with decreasing term, benefit capped at the loan), blanket life (one changing group, one common hazard — no names, no certificates), franchise/wholesale insurance for groups too small to qualify, and Retired Lives Reserve, which pre-funds term premiums for retirement. The federal alphabet: SGLI (servicemembers, up to $500k, automatic), FSGLI (spouse up to $100k, kids $10k free), VGLI (SGLI → renewable term after separation), and FEGLI (federal employees, salary + $2,000).
A bank arranges life insurance on its borrowers so outstanding loans are repaid if a borrower dies. This is:
A policy covering all passengers of an airline, with no individuals named and no certificates issued, is:
Taxation of Group Life
[4]The $50,000 rule is the money question: employer-paid premiums are deductible to the employer, and the employee receives the first $50,000 of coverage tax-free — but the cost of coverage above $50,000 hits the employee's W-2 as imputed income. Employees never deduct their own contributions, and sole proprietors/partners can't deduct premiums on their own lives. Proceeds follow the familiar life-insurance rule: lump sum tax-free; installment interest taxable.
A group life beneficiary elects to receive proceeds in monthly installments instead of a lump sum. The tax result:
Carla's employer pays the full premium on $120,000 of group term coverage for her. For tax purposes, Carla must:
Close your eyes for a moment, then write everything you remember from this chapter — rules, numbers, traps. Recalling first is worth more than rereading.
Recall captured. Compare it against the summary below.
What this chapter covered
- How Group Life Works: Master Policy & CertificatesMaster policy → employer. Certificate → employee. Beneficiary choice → employee. That triangle answers a surprising number of questions.
- Contributory vs Noncontributory & Who Can Be a GroupContributory = employees CONTRIBUTE = 75%. Noncontributory = 100%. Swapping those two numbers is the single most common trap in this chapter.
- Group Underwriting
- The Conversion PrivilegeConversion is always term → PERMANENT at ATTAINED age. And "employee dies on day 20, unconverted" → the GROUP policy pays. Both are guaranteed exam material.
- Other Group Forms & Federal ProgramsBlanket = no certificates. Credit life premium is based on claims experience, not the borrower's age. VGLI converts SGLI to TERM, not whole life.
- Taxation of Group LifeAbove $50,000, the employee is taxed on the COST of the excess coverage — never on the face amount itself.
Lesson complete — every check passed from memory. Your pretest answers above are now revealed.