Texas group life insurance rules: conversion, grace period and assignment

Group life is the largest single subject in the Life Agent exam's life-only Texas section, and every rule in it is in TIC Chapter 1131. Most questions ask for a number of days or who may do what.

Questions and answers, explained

All 11 questions above, with the correct answer and why it is correct. Everything here is on texas group life insurance rules: conversion, grace period and assignment.

1. An employer pays the entire premium for $200,000 of group term life insurance on a 52-year-old employee. What amount of coverage generates imputed income, and how is the cost measured?

   • A$150,000, measured by the IRS Table I uniform premium rate for the employee's ageCorrect
   • B$200,000, measured by the employer's actual premium outlay
   • C$200,000, measured by the IRS Table I uniform premium rate
   • DNone; employer-paid group term life is fully excludable from income

   Why: IRC Section 79 excludes the first $50,000 of employer-provided group term life; the cost of the excess $150,000 is imputed to the employee using the IRS Table I uniform premium rates for his age bracket, not the employer's actual cost. Any premium the employee pays with after-tax dollars reduces the imputed amount. Choice D forgets the $50,000 ceiling on the exclusion. Outline IV.

   Reference Texas outline #124401, general section IV (Retirement and other insurance concepts)

2. An insured under a Texas group life policy wants to assign her group life benefits. Under TIC 1131.006, to whom may she NOT assign them?

   • AA trust she created for her children's education
   • BHer spouse
   • CHer employerCorrect
   • DA bank, as collateral for a loan

   Why: TIC 1131.006 lets an insured, subject to the policy's terms, make an absolute or collateral assignment of group life rights and benefits to any individual, firm, corporation, association, trust or other entity other than the insured's employer.

   Reference TIC 1131.006 — Texas outline II.D.4

3. Which statement about the taxation of an employer-paid group term life insurance plan is correct?

   • AThe employer may not deduct the premiums it pays on group term coverage for its own employees
   • BThe employer deducts premiums, the first $50,000 is tax-free to the employee, and the death benefit is tax-freeCorrect
   • CThe employee may deduct the imputed income on coverage above $50,000 on his own personal tax return
   • DThe death benefit is taxable to the beneficiary because the employer deducted the premium as a business expense

   Why: Group term life premiums are a deductible employee-benefit expense because the employer is not the beneficiary — the contrast is key person insurance, where the employer IS the beneficiary and the premiums are therefore not deductible. Choice D links two unrelated rules: the employer's deduction has no effect on the beneficiary, who still receives the death benefit income-tax-free. Outline IV.

   Reference Texas outline #124401, general section IV (Retirement and other insurance concepts)

4. How long after a Texas group life policy's issue date does the policy become incontestable, except for nonpayment of premium?

   • AIt is never incontestable
   • BOne year, which is shorter than the period for individual policies
   • CThree years
   • DTwo yearsCorrect

   Why: TIC 1131.104 makes a group life policy incontestable, except for nonpayment, after two years in force from issue, and bars using an insured's statement about insurability after the coverage has been in force two years during the insured's lifetime, or unless the statement is in a written instrument the insured signed.

   Reference TIC 1131.104 — Texas outline II.D.5

5. In a noncontributory group life insurance plan, the employer pays the entire premium. What percentage of eligible employees must be covered under the plan?

   • A25 percent
   • B50 percent
   • C75 percent
   • D100 percentCorrect

   Why: Noncontributory plans require 100 percent participation of eligible employees: since employees pay nothing, covering everyone prevents adverse selection and simplifies administration. The 75 percent figure (the closest distractor) is the typical participation requirement for contributory plans, in which employees pay part of the premium. Outline IV.C (contributory vs. noncontributory).

   Reference Texas outline #124401, general section IV (Retirement and other insurance concepts)

6. A Texas group life policy covers an employee's spouse. The employee leaves the job. Under TIC 1131.354, what rights does the spouse have?

   • ANone; a spouse's coverage simply ends with the employee's and cannot be converted
   • BThe same conversion rights for the spouse's coverage as the employee hasCorrect
   • CA refund of the spouse's premiums only
   • DCoverage that continues free for two years

   Why: TIC 1131.354 gives a covered spouse whose group term coverage ends because the employee's employment ends, the employee dies, or the group contract ends the same conversion rights for the spouse's coverage as the employee has.

   Reference TIC 1131.354 — Texas outline II.D.2

7. Under TIC 1131.105, how are statements made by an insured in a Texas group life application treated?

   • AAs representations, usable in a contest only if a copy was furnished to the insured or beneficiaryCorrect
   • BAs warranties that void the coverage if any detail turns out to be wrong
   • CAs binding only on the employer
   • DAs confidential, never usable in any contest

   Why: TIC 1131.105 requires a copy of the policyholder's application to be attached to the policy, treats statements of the policyholder or an insured as representations rather than warranties, and bars using an insured's statement in a contest unless a copy of the instrument containing it was furnished to that person or the beneficiary.

   Reference TIC 1131.105 — Texas outline II.D.5

8. An employee covered by a Texas group life policy quits her job. To convert her coverage to an individual policy without evidence of insurability, she must apply and pay the first premium within:

   • A10 days after her employment ends
   • BSix months after her employment ends
   • C31 days after her employment endsCorrect
   • D60 days after her employment ends

   Why: TIC 1131.110 gives a departing member the right to an individual policy, issued without evidence of insurability, if she applies and pays the first premium within 31 days after employment ends. She may choose any individual form the insurer customarily issues other than term, in an amount up to the coverage that ended.

   Reference TIC 1131.110 — Texas outline II.D.2

9. An employer cancels its Texas group life policy. Under TIC 1131.111, which insured employees have a right to convert to an individual policy?

   • ANo one, because conversion applies only when an individual employee leaves the job
   • BThose insured under the group policy for at least five years before it endedCorrect
   • COnly employees age 50 or older
   • DEvery employee, no matter how briefly insured

   Why: When the group policy itself terminates or is amended to end coverage for a class, TIC 1131.111 gives the conversion right to each person who had been insured under it for at least five years before the termination, subject to the same conditions as a departing employee and a possible cap on the amount.

   Reference TIC 1131.111 — Texas outline II.D.2

10. A Texas group life policy is fully paid by the employer, with no employee contribution. Under TIC 1131.204, whom must it insure?

    • AAll eligible employees, except any whose evidence of insurability is unsatisfactoryCorrect
    • BOnly full-time employees with at least one year of service
    • CAt least 75 percent of eligible employees, with the employer choosing which ones to include
    • DOnly employees who sign up during an open enrollment period

    Why: TIC 1131.204 requires a group policy to cover at least two employees at issue and, when employees pay no part of the premium, to insure all eligible employees, or all of them except those whose evidence of insurability is not satisfactory to the insurer. Noncontributory plans cannot let employees opt out, which protects against adverse selection.

    Reference TIC 1131.204 — Texas outline II.D.1

11. How long is the grace period for premiums on a Texas group life insurance policy under TIC 1131.103?

    • A10 days
    • B7 days
    • C60 days
    • D31 daysCorrect

    Why: TIC 1131.103 requires a 31-day grace period for every premium after the first, during which death benefit coverage continues unless the policyholder gives written notice of discontinuance. The policy may make the policyholder liable for a pro rata premium for that time.

    Reference TIC 1131.103 — Texas outline II.D.5

Drill the whole domain

• Texas Statutes and Rules — Life Insurance Only (12.5%)
• Retirement and Other Insurance Concepts (10%)

Other topics

• Texas life agent license rules: applying, renewing and appointments
• Life insurance contract law: elements and characteristics

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