Group Life Insurance (Entire Set)

Determining Eligibility

A group life insurance plan must benefit at least 70% of all employees. Furthermore, at least 85% of all participating employees must not be key employees.

Additional Features of Group Term Life Insurance -Conversion to Individual Policy

All group policies contain a conversion privilege. A covered employee has the option of converting his or her group term life coverage to his or her own individual plan upon termination from the company. Termination of employment includes an employee who is laid-off or who leaves a job voluntarily. In most cases, when an employee is leaving an employer, they may take advantage of the conversion privilege. However, most insurers only allow the terminated employee to convert the group coverage to an individual whole life policy.

Incident of Ownership - Beneficiary Selection

Beneficiary While the employer is the contract owner in a group life policy, they retain all rights of ownership except the right to name or change the beneficiary. Therefore, the covered employee or "certificate holder" possesses an "incident of ownership" in the group plan. Therefore, it is the "certificate holder" (insured employee) who names the beneficiary, not the policy owner (employer). The employee may name the employer as a beneficiary of the group life policy only if the employer has an insurable interest in the employee. For example, an employer may have an insurable interest in a key executive with 20-years of experience. However, the employer probably does not have an insurable interest part-time clerk. In addition, in recent years, many insurers have been permitted by modifications of State laws to include an assignment provision in group life policies. Of course, any assignment must be in writing and be filed with the insurer.

Contributory Plan

Contributory An employee group insurance plan in which employees share the cost. The insurance company requires that at least 75% all eligible employees participate. With a contributory group insurance plan, the employees or plan participants contribute to the premium payments.

Blanket Life Insurance

Covers groups of people that are exposed to the same hazard, such as passengers on an airplane. No one is named on the policy, and certificates of coverage are not given out. Individuals are only covered for the specified common hazard.

Family Servicemembers' Group Life Insurance Coverage (FSGLI)

Family Servicemembers' Group Life Insurance Coverage (FSGLI) is a component of the Servicemembers' Group Life Insurance (SGLI) program. FSGLI provides coverage for spouses and children of Servicemembers insured under SGLI. Non-military spouses are covered automatically for $100,000 or the amount of the member's coverage, whichever is less. Premiums for spouse coverage are based on the spouse's age and amount of coverage. Dependent children are covered for $10,000 each at no cost to the member.

Group Insurance versus Individual Insurance

Features that separate group insurance from individual insurance include: 1. Underwriting a. In an individual policy, the insured must prove they are insurable. b. In group insurance, the group must meet various criteria, but the insureds are not individually underwritten. 2. Policy ownership a. Traditionally with individual insurance, the insured is also the policy owner. While there may be instances of third-party ownership, this is not common. b. With group insurance, the insured is rarely the policy owner. There is one master policy owned by the employer or plan sponsor. i. Employers or plan sponsors receive the master policy, and as such, are the policy owner or contract holder. ii. Employees or plan participants receive the certificates of insurance (not individual policies), and as such, are certificate holders. 3. Policy type a. Group life insurance is always considered temporary insurance. Typically, annually, renewable term is used, which provides a fixed amount of coverage throughout the contract. b. Individual insurance can be any of the previously discussed temporary or permanent insurance products. c. Whenever a person converts their group insurance to individual insurance, they are always converting temporary protection to permanent protection. 4. Cost a. Individual insurance policies are considerably more expensive for the insurer to issue (underwrite, commission, billing, maintenance, etc.). As we've learned, these administrative costs are passed on to the customer, making individual policies more expensive to purchase. b. Group insurance policies are substantially less expensive for the insurer to underwrite, issue, and maintain. As such, group insurance is much cheaper for the customer to purchase. c. In some cases, the employer or sponsor may pay a substantial portion or all of the premium cost for the group insurance policy. With individual insurance, the customer (policy owner) is always responsible for all of the premium cost. Note: Since the individual does not own or control the policy, they are issued a certificate of insurance (sometimes called certificate of coverage and benefits) to serve as evidence of an employee's coverage. The actual policy, which is called the master policy, is issued to the employer, who becomes the policyholder.

Taxation of Group Life Insurance Plans

For a group life insurance plan to receive favorable tax treatment, there are specific requirements in place. These requirements ensure that the average employee is not discriminated against in favor of higher-level employees.

Franchise Life Insurance

Franchise life insurance is used when participants are employees of a common employer (i.e., the employer may operate several companies) or are members of a common association or society. The employer/association/society is a sponsor of the plan and may or may not contribute to the premium payments. Unlike the employer's group plan, each individual is issued an individual policy. These individual policies will remain in force as long as premiums are paid, and the employee/member maintains their relationship with the sponsor. These are used by small groups who individually do not meet the state's minimum numbers required by law.

Group Policy Termination

If the master policy is terminated, each individual member who has been insured for at least five years is permitted to convert to an individual policy, providing coverage up to the face value of the group policy.

Classification of Risk

Insurers require that a minimum number of group members/employees participate in a group insurance plan in order to minimize adverse selection. Adverse selection means that the people most likely to need life insurance will purchase life insurance in greater numbers than those in good health. After all necessary information is collected on an applicant, the underwriter will classify the applicant based on the degree of risk assumed. The following rating classification system is used to categorize the favorability of a given risk: • Preferred - Low Risk- Lower Premiums • Standard - Average Risk - No Extra Ratings or Restrictions • Substandard - High Risk - Rated Up - Higher Premiums • Declined - Not Insurable - Potential of Loss to Insurance Company is Too High Lower risks tend to have lower premiums. If an applicant is too risky, the insurer will decline coverage.

Eligible Groups

People may not form a group secure group insurance coverage. The securing of such coverage must be incidental to the group's formation. In other words, a group of people cannot form an organization whose primary purpose is to secure insurance coverage for the group. Businesses are operated in order to produce a product or provide a service and eam a profit, and therefore, are eligible to purchase group insurance. A group of persons who are engaged in occupations of a common industry may form an association (ie., all hat manufacturers) and later purchase coverage. Remember, the primary requirement for groups to offer group insurance is that the group is formed for a purpose other than acquiring insurance. Offering group insurance products should be a benefit of the group, not the purpose of the group. States may impose additional requirements. For example, states may require the group to have existed for more than two years or has a minimum of two members. While there is generally an employment or professional relationship present in order for group coverage to be secured, this is not always the case. Examples of some of the groups eligible to participate in group insurance exam include but are not limited to: • Single employee groups (employer) *Multiple employee groups (employment-related) • Labor Unions • Trade Associations • Credit/Debit groups Fraternal Organizations • Customer groups (such as credit union members) *Trustee Groups (Established by two or more employers or labor unions)

Premiums For Group Life Insurance

Premiums paid by the employee for their group life insurance are not tax-deductible. Premiums paid by employers for group life insurance are tax-deductible as a legitimate business expense as long as specific requirements are satisfied. However, a sole proprietor or partner may not deduct premiums for group life covering his own life since he is not considered to be an employee. The cost of the first $50,000 of group term life is tax-exempt to an employee. The cost of coverage amounts above $50,000 may be taxable (as ordinary income) to the employee. Most employers will establish benefit schedules according to the following: • Earnings • Employment position • Flat benefit

PRINCIPLES OF GROUP LIFE INSURANCE - Principles and Characteristics of Group Life Insurance

Principles Group insurance is a way to provide life insurance, health insurance, or both kinds of coverage for a number of people under one contract. Typically, group insurance is provided by an employer for its employees; however, it is available to other kinds of groups as well, as we will see. Different from individual life insurance, which is written on a single life, group life insurance is written on more than one life. Group life insurance is usually written for employee-employer groups and is most often written as an annually renewable term policy. Group life insurance differs from individual life insurance contracts in several ways. One of the differences between the two is that group insurance is most often comprised of annual renewable term life insurance. In contrast, individual insurance contracts may be term life or whole life insurance. Underwriting is handled differently, and varying types of policy provisions appear in a group life policy. Group life insurance coverage is characterized by the underwriting of numerous individuals rather than one. Group term life insurance, like all insurance contracts previously mentioned, is a two-party contract between the policyholder and the insurer (just like an individual contract). However, unlike an individual insurance policy, the insured is almost never the policy owner of group life insurance. The employer generally plays the role of the policy owner. The employer or group providing the group life coverage pays all or a portion of the premium and is the policyholder. The employer orplan sponsor receives the master policy. In contrast, the covered employees or plan participants receive a certificate of coverage or a booklet that describes the benefits, the coverage provided, and how long the insurance coverage will last. The covered employee or plan participant is also known as the certificate holder. Types of groups that are eligible include employees of a single employer, credit groups, labor unions, and multiple employer groups.

Proceeds For Group Life Insurance

Proceeds from a group life policy are tax-free if taken in a lump-sum. Proceeds taken in installments will be subject to taxes on the interest portion of the installments.

Retire Lives Reserve and Qualified Plans

Retired Lives Reserve (RLR) is a group life insurance product with the objective of providing continuing life insurance protection beyond retirement. RLR provides annual renewable term insurance and a reserve account that accumulates funds before retirement, which will be used to pay premiums on the term insurance after a person's retirement. Under this plan, an employer can make a tax-deductible contribution to the fund (i.e., reserve account) on behalf of employees, and the contributions are not tax- deductible to employees. A life insurance company or trust can administer this fund or reserve account. A qualified retirement plan may purchase life insurance to provide death benefits under very limited circumstances. The plan document must authorize such a purchase, but the decision to buy a policy may be made by either the plan administrator (employer) or the participant. In a defined contribution plan, the policy is part of the participant's account. In a defined benefit plan, the death benefit is part of the definite determinable benefit provided to the participant by the plan. Most importantly, the purchase of life insurance must be incidental to the primary purpose of providing retirement benefits under the plan.

Servicemembers' Group Life Insurance (SGLI)

Servicemembers' Group Life Insurance (SGLI) is provided up to $400,000 (in $50,000 increments) for full-time members of the armed services. The coverage provided is group term life insurance, and all active members are covered unless they choose otherwise.

• Underwriting Requirements for Group Life Insurance

Sound group underwriting can prove profitable to an insurer, mainly since it reduces adverse selection. Adverse selection or anti-selection is the tendency or danger of an insurer to write (i.e., approve) more bad risks than acceptable risks. People with more significant risk tend to seek insurance coverage more than those with little risk. Since more individuals are covered under group policies, there is a higher probability that a "bad" risk will be included. The insurer may continue to earn a profit, however, if the acceptable risks far outweigh the bad. This offset of high versus low risk is what an insurer is depending on when they write group life coverage. Writing large groups of individuals also helps to reduce adverse selection based on the law of large numbers. Other group life characteristics include: Proof of insurability may not be required of larger groups. Insurers may require some type of insurability for smaller groups. As we learned, the smaller the group, the greater the potential for adverse selection (law of large numbers). For example, if an insurer writes a group life insurance policy for five hundred employees, the law of large numbers says that some of those employees will be of high risk, and some will be low risk, but the majority should be of standard risk. The insurance company will hardly notice if, throughout the year, they need to pay out one or two death claims out of the group of five hundred insureds. However, if the insurer writes a group life insurance policy for ten insureds, the law of large numbers no longer applies. The risk is far less predictable. Paying out one or two death claims out of the group of ten insureds could have a significant impact. Group life plans will not exclude employees with a physical impairment (i.e., paralysis) from the group life plan. Several people may not form a group just to secure group insurance coverage. The securing of such coverage must be incidental to the group's formation. In other words, a group of people cannot form an organization whose primary purpose is to secure life insurance coverage. Businesses are founded in order to produce a product and earn a profit, and therefore are eligible to purchase group insurance. A group of persons who are engaged in occupations of a common industry may form an association (i.e., all hat manufacturers) and later purchase group coverage. There generally must be an employment relationship present in order for group coverage to be secured. Underwriters take policy persistency into account as well. As it pertains to insurance, persistency is the percentage of active policies in force, without lapsing or being replaced by policies of other insurers. Insurers may measure policy persistency in various periods. For example, one year, three years, or five years from policy issue. Due to the expenses involved with acquiring and issuing a new policy, persistency and be a vital factor in the stability and success of an insurer. The insurer may shy away from groups that change insurers regularly. Therefore, the insurer feels that writing such groups does not represent an acceptable risk.

MISCELLANEOUS GROUP LIFE INSURANCE -Life Insurance for Members of the armed Forces and Federal Employees

The Federal Government provides life insurance coverage for those in the armed services and other federal employees.

PRINCIPLES OF GROUP LIFE INSURANCE -Employer Responsibilities

The employer is responsible for the selection of group coverages, record keeping, and employee enrollment. The employer is not permitted to discriminate, especially when the plan is noncontributory.

Noncontributory Plan

The employer pays the entire cost of the plan. The insurance company requires that 100% of all eligible employees participate. The most significant benefit of a noncontributory insurance plan is that it helps the insurer avoid adverse selection. With a noncontributory group insurance plan, the employees or plan participants do NOT contribute to the premium payments.

Conversion Period

The period of time during which the terminated employee may convert to an individual plan of insurance without proof of insurability is within 31 days after termination. If death occurs during the conversion period (31 days after termination), even if the employee does not plan to convert to an individual policy, the death claim will be paid by the group policy. An individual is covered under the group policy during the conversion period No medical exam or other proof of insurability is required to convert coverage to an individual policy. In other words, an insured employee may exercise the conversion privilege regardless of his or her insurability. If a member's coverage is terminated, the member and their dependents may convert their group coverage to individual permanent (whole life) coverage without having to show proof of insurability. If conversion occurs, the premium is based on the insured's (employee/dependent) current or attained age.

Group Credit Life

These are set-up by banks, finance companies, etc., to provide that if the insured dies before a loan is repaid, the policy benefits will be used to settle the loan balance. Premiums for group credit life insurance are based on claims experience and expense factors, not necessarily the borrower's age. The premiums are usually paid by the insured. A decreasing term policy is commonly used.

Veterans' Group Life Insurance & Federal (VGLI)

Veterans' Group Life Insurance (VGLI) provides for the conversion of Servicemembers' Group Life Insurance (SGLI) coverage to a renewable term policy of insurance protection after a servicemember's separation from service. Servicemembers and their spouse may be able to convert their SGLI or VGLI to permanent insurance through a commercial insurer without proving insurability.

Federal Employees Group Life Insurance (FEGLI)

provides group term life insurance for all other federal employees or civil service workers.