Types of Group Life Plans
Employers can offer various types of group life insurance to meet different objectives. Each type has distinct features, tax implications, and purposes.
Group Term Life Insurance
Group term life is the most common type of employer-provided life insurance. It provides pure death protection without cash value accumulation.
Characteristics of Group Term Life
| Feature | Description |
|---|---|
| Coverage type | Pure death protection |
| Cash value | None |
| Premium structure | Renewable annually; increases with age |
| Typical coverage | 1x to 3x annual salary |
| Maximum coverage | IRS limits on tax-free employer-paid coverage |
Tax Treatment of Group Term Life
Under IRC Section 79, employer-paid group term life has specific tax rules:
| Coverage Amount | Tax Treatment |
|---|---|
| First $50,000 | Tax-free to employee |
| Over $50,000 | "Imputed income" taxed to employee based on IRS Table I rates |
IRS Table I (Imputed Income Rates)
When employer-paid coverage exceeds $50,000, the employee must include "imputed income" based on their age:
| Age Bracket | Monthly Cost per $1,000 of Coverage |
|---|---|
| Under 25 | $0.05 |
| 25-29 | $0.06 |
| 30-34 | $0.08 |
| 35-39 | $0.09 |
| 40-44 | $0.10 |
| 45-49 | $0.15 |
| 50-54 | $0.23 |
| 55-59 | $0.43 |
| 60-64 | $0.66 |
| 65-69 | $1.27 |
| 70+ | $2.06 |
Exam Tip: The $50,000 tax-free limit applies only to employer-paid group term life. Employee contributions and individual policies are not subject to this rule.
Group Permanent Life Insurance
Group permanent life provides lifetime coverage with cash value accumulation. It's less common than group term but offers additional benefits.
Types of Group Permanent Life
| Type | Description |
|---|---|
| Group whole life | Level premiums, guaranteed cash value |
| Group universal life | Flexible premiums and death benefits |
| Group variable life | Cash value invested in subaccounts |
Advantages of Group Permanent Life
- Cash value accumulation for employees
- Portable—employees can keep policies after leaving
- Can be used for retirement supplementation
- Level premiums over time
Disadvantages
- Higher premiums than group term
- More complex to administer
- May not be as cost-effective for basic protection needs
Group Universal Life (GUL)
Group Universal Life has become increasingly popular as a voluntary benefit offering.
How GUL Works
| Feature | Description |
|---|---|
| Premiums | Flexible—employee determines contribution |
| Death benefit | Adjustable within limits |
| Cash value | Grows based on current interest rates |
| Participation | Usually voluntary with payroll deduction |
Underwriting for GUL
| Coverage Amount | Underwriting Required |
|---|---|
| Up to guaranteed issue limit | No medical questions |
| Above guaranteed issue limit | Evidence of insurability required |
Advantages of GUL
- Employees can customize coverage amounts
- Portable when leaving employment
- Cash value accumulation
- Often competitive rates due to group pricing
Group Variable Life
Group variable life combines death protection with investment options, similar to individual variable life but offered through an employer.
Key Characteristics
| Feature | Description |
|---|---|
| Cash value | Invested in separate account subaccounts |
| Investment risk | Borne by the employee |
| Securities regulation | Must be sold with a prospectus |
| Agent licensing | Requires securities license (Series 6 or 7) |
Regulatory Requirements
Because group variable life involves securities:
- Subject to SEC regulation
- Must provide a prospectus
- Agent must hold appropriate securities license
- FINRA oversight applies
Supplemental and Voluntary Coverage
Many employers offer voluntary or supplemental life insurance in addition to basic coverage.
Common Voluntary Options
| Option | Description |
|---|---|
| Supplemental term life | Additional coverage beyond basic group term |
| Dependent life | Coverage for spouse and children |
| Accidental death & dismemberment (AD&D) | Extra benefit for accidental death or injury |
| Voluntary universal life | Employee-paid permanent coverage |
Dependent Life Insurance
Coverage for dependents typically includes:
| Dependent | Typical Coverage |
|---|---|
| Spouse | Flat amount (e.g., $10,000-$50,000) or percentage of employee's coverage |
| Children | Smaller flat amount (e.g., $2,000-$10,000 per child) |
Comparison of Group Life Types
| Feature | Group Term | Group Whole | Group UL | Group Variable |
|---|---|---|---|---|
| Cash value | No | Yes | Yes | Yes |
| Premium flexibility | No | No | Yes | Limited |
| Investment choice | N/A | N/A | No | Yes |
| Portability | Limited | Yes | Yes | Yes |
| Cost | Lowest | Higher | Moderate | Higher |
| Securities license | No | No | No | Yes |
Key Takeaways
- Group term life is most common; the first $50,000 of employer-paid coverage is tax-free
- Coverage over $50,000 creates imputed income based on IRS Table I rates
- Group permanent life (whole life, UL, variable) offers cash value but costs more
- Group variable life requires a securities license and prospectus
- Voluntary coverage allows employees to purchase additional protection
- Dependent life extends coverage to spouse and children
Under IRC Section 79, employer-paid group term life insurance is tax-free to the employee up to:
Group variable life insurance differs from other group life products because it:
If an employee has $150,000 of employer-paid group term life insurance, how much coverage is subject to imputed income taxation?
Group Universal Life (GUL) typically allows employees to:
13.3 Eligibility and Enrollment
Continue learning