[Life/Health License] - CH 6 - Group Life Insurance

Servicemembers' Group Life Insurance (SGLI)

Offers inexpensive group term life insurance for members of the armed forces. Coverage is offered in $50,000 amounts up to a maximum of $400,000. Servicemembers have the option of converting their term protection to permanent protection. The cost of coverage is not based on age, and premiums are 65 cents for each $1,000 of coverage.

Credit Union Groups

Cooperative, member-owned depository financial institutions (credit unions) may offer group insurance to their members.

Association Groups

Association groups include alumni associations and professional associations. Group insurance can be provided to all association members. For an association to qualify for group insurance, it must meet all of the following requirements: 1. Organized into a group naturally (for purposes other than simply to acquire insurance coverage) 2. An active association for at least two years 3. Have a constitution and bylaws 4. Hold regular meetings at least annually 5. Have at least 100 members

Certificate of Insurance

Group contracts are between the insurer and the policyowner. The policyowner is the employer, association, labor union, trusteeship, or any type of eligible group. The policyowner purchases and is the sponsor of the group contract for the benefit of its employees or members. The policyowner receives the master policy, and each individual employee or member receives a certificate of insurance as evidence of coverage. Each certificate of insurance lists the policy benefits and any named beneficiaries. The certificate's face page includes the coverage effective date, any dependents covered, and the policy face amount. All provisions such as age limits, providing notice of claim, and conversion are stipulated in the policy face page.

Group Term Life

Group life insurance is most commonly offered as annual renewable term. The policy is issued for one year and may be renewed annually without evidence of insurability at the discretion of the policyowner. The insurer may raise premiums each year, if necessary, to offset the group's experience rating. Upon the anniversary date of the group term master policy, the insurance company may adjust the premium in order to bring the group policy in line with current mortality rates and operating expenses. Regardless, this is the most cost-effective way of providing group life insurance.

Probationary Period for Group Life Insurance

Individuals who join a group must undergo a waiting period prior to being eligible for coverage under the group plan. This waiting period is called a probationary period. Every time new insureds enroll in a group policy, the insurer incurs enrollment costs. Furthermore, groups that have frequent turnover incur great enrollment expense. For this reason, group policies have a probationary period. Probationary periods usually last for the first 90 days of employment.

Veterans' Group Life Insurance (VGLI)

like SGLI, provides a maximum of $400,000 of group term life insurance for Veterans. VGLI policies provide convertible term life insurance. Veterans have the option to convert their amount of VGLI coverage to an individual life insurance policy. VGLI premiums are based on age using several age brackets of premium rates. VGLI insurance renews every 5 years. An insured has the option of increasing their coverage up to $25,000 on the five-year anniversary of the policy if he or she meets the following requirements: 1. He/she has an active VGLI policy 2. He/she currently has less than $400,000 VGLI 3. He/she is under age 60 on the next policy anniversary date 4. He/she requests the increase during the 120-day period prior to the 5-year anniversary of the policy.

Nonprofit Organization Groups

Nonprofit organizations, such as charities, foundations, and religious organizations may provide group insurance to their members.

Eligible Groups

1. Employers 2. Associations 3. Nonprofit Organizations 4. Labor Unions 5. Government 6. Credit Unions 7. Creditors 8. Multiple Employer Trust 9. Multiple Employer Welfare Arrangement

Government Groups

1. FEGLI 2. SGLI 3. VGLI

Creditors Groups

Creditor groups provide group credit insurance protection on the lives of debtors. If debtors die or become disabled prior to paying off the balance on a debt, then the creditor receives the policy proceeds to compensate for the debt. The creditor (bank or lending institution) is the policyowner, is issued the master policy, and is the beneficiary. The individual insureds are referred to as debtors. The maximum amount of credit insurance on each debtor is the balance of the debt at any time.

Other Forms of Group Life Insurance

Franchise or wholesale insurance is group insurance that covers members in a common group. Unlike most group insurance, there is not a master policyholder for franchise insurance. Instead, a group entity sponsors a plan where members pay premiums to the insurance company. Distinct from group insurance policies, individuals insured under franchise policies each receive their own individual policy. Franchises do not issue standardized policies as in group insurance. Instead, individuals insured under franchise policies can elect specific benefits catered to their unique needs. Franchise plans are often used for groups that are smaller than the minimum number required by state law and consist of individuals who do not qualify for ordinary group life insurance. Group Credit Life Group credit life insurance is intended to cover the life of a debtor in the event the debtor dies prior to paying off a debt. The creditor owns the credit life insurance policy and is the beneficiary. The debtor is the insured individual with the debt who pays the premiums and receives a certificate of coverage from the creditor. Credit life insurance pays the amount of the outstanding debt. Credit life policies usually are issued for a period of 10 years or less. Once the debt is paid off, the debtor's coverage terminates. Credit life policies do not have conversion rights. Group credit policies must maintain a minimum number of insureds at all times, which is typically 100 people. In addition, there is a limit on the amount of insurance per debtor.

Types of Group Coverage

Group Term Life Group Permanent Life

Conversion Option for Groups

Insurers of group life policies must include a conversion option permitting the member to convert group life coverage to an individual policy upon the insured's employment termination, removal of a class of insureds, or when the master contract is terminated. Conversion to Individual Policy Under a group policy, if a member's coverage is terminated, the member and his dependents may convert their group coverage to individual whole life coverage. Evidence of insurability cannot be required upon conversion. The individual whole life premiums will be determined based upon the insured's attained age, and the face amount will be the same as was provided under the group policy. The premium is likely to be higher. Conversion Period The conversion period is 31 days after termination from group coverage. This means the individual must apply for individual coverage within 31 days after the date of group coverage termination. The conversion option must be exercised during the conversion period, and the individual is covered under the group policy throughout the conversion period. If the individual is not made aware of his conversion rights, then a 15-day extension period is granted to convert the coverage. The conversion period is limited to a maximum of 60 days from the date of group coverage termination. If the individual dies during the conversion period, the full death benefit will be paid by the insurer, regardless of whether the application for individual coverage was submitted. Group Policy Termination If an employer discontinues premium payments, the group life policy will be terminated. In order to terminate the group life insurance policy, the insurance company must notify the employer of the policy's cancellation and then the employer must notify its employees of the cancellation. If the master policy is terminated, each individual member who has been insured under the group contract for at least five years is permitted to convert the group coverage to individual whole life coverage. The converted coverage will have a face value at least equivalent to that provided under the group policy, less the amount of any new coverage purchased during the conversion period, or $10,000, whichever is less. Individuals must apply for policy conversion within one month of the master policy cancellation. Rules for Total Disability If a group policy requires members to be active within the group, then those who become totally disabled will be allowed to continue their group coverage for a maximum of six months after the onset of the total disability. The disabled insured must pay the premium, and the premium cannot be changed.

Eligibility Period for Group Life Insurance

Noncontributory group plans must cover all eligible individuals immediately after the probationary period expires. Contributory plans require eligible individuals to satisfy the probationary period and enroll in the group plan during the eligibility period, spanning a period of 30 or 31 days. If eligible individuals do not enroll during the eligibility period, then they will be required to undergo a medical exam, which allows the insurer to select insureds on an individual basis instead of on a group basis, subjecting individuals to more stringent underwriting requirements. In this way, insurers can prevent adverse selection. If the group does not use the eligibility period, then the open enrollment period is used.

Benefits From Group Life Policies

The employer determines the amount and type of life insurance benefits for group life plans. In some cases, benefits are based on the employee's earnings. The employer has an "earnings schedule" where each level of salary corresponds to a certain amount of benefits. Another way to establish benefits is by job title. In this case, the employer establishes how much life insurance is allotted for each position. Example: A regular employee may be provided $10,000 of life insurance, while executives are provided with $100,000 of life insurance. Finally, a third option called the "flat benefit" is where each employee is provided the same amount of life insurance, regardless of job title or earnings. Regardless of which method an employer uses when establishing the amount of benefits allotted to each employee, an employer may not discriminate against any employee on the basis of gender or age.

Funding for Group Life Insurance

Group insurance can be funded in the following ways: Minimum premium: An agreement is made between the policyowner and the insurer in which the policyowner pays the minimum amount of the premium for anticipated claims, and the insurer pays the excess. Retrospective premium: The insurer collects a base premium amount, but is entitled to collect additional premium amounts based on the actual loss experience. Administrative Services Only (ASO): This option applies specifically to health insurance - a group policy is self-funded, and an insurer is subcontracted to process claims. Shared-funding: This funding agreement is specific to health insurance. It allows the policyowner to self-fund its medical expenses, but after a specified amount, the insurer will cover the remaining costs.

Dependent Coverage for Groups

Most group life policies (except group credit life) allow the insured's dependents to be covered under the group plan. These include the insured's spouse, children (including natural, step, foster and adopted) under the dependent age limit, dependent parents, and other individuals who are dependent on the insured. The amount of coverage for each covered dependent cannot exceed 50% of the insured member's coverage. Example: If an employee is covered for $15,000 then the maximum coverage for the employee's wife and two children is $7,500 each.

Open Enrollment Period for Group Life Insurance

The open enrollment period is the period of time new members may enroll in group coverage each year, and when members can change their coverage. New members that miss the open enrollment period may either be required to show evidence of insurability or wait until the following year's open enrollment period to enroll.

Contributory vs. Noncontributory Group

Group insurance premiums may be paid solely by the policyowner or jointly by the policyowner and the insureds. Contributory plans are paid by both the policyowner and the insureds. This reduces adverse selection because the insureds share in the cost of premiums. Noncontributory plans are paid solely by the policyowner. In group employer policies, employers must pay at least some portion of the premium. Non-employer groups in which the members are fully responsible for paying premiums and the group pays no part of the premiums are called fully contributory plans. Contributory group plans require at least 75% participation of the group's eligible employees. For noncontributory group plans, 100% of the group's eligible employees must participate in the group plan.

Multiple Employer Welfare Arrangement (MEWA)

METs and MEWAs are used synonymously today, but previously MEWAs were distinguished by the fact that they were partially self-funded METs. The premiums were put into a trust, and claims were paid from those premiums. These groups were not fully covered by an insurance policy. MEWAs frequently could not pay their claims and ran into financial trouble. Essentially, MEWAs were operating as unlicensed and unregulated insurers. MEWAs are now regulated under state and federal laws with guidelines as to minimum assets required to be held to meet claims needs.

Multiple Employer Trust (MET)

A multiple employer trust is when several employers or labor unions form a trust fund to reduce the tax effects of providing employee benefits, especially life insurance. The group of employers is called a multiple employer group. The trust itself is a MET. A master policy is issued to the MET's trustees if at least one of the following conditions is met: - At least two employers in identical or similar fields establish the trust, or - One or more labor unions or associations establish the fund. This arrangement is called a Taft-Hartley Trust or negotiated trusteeship and this solves the problems of labor unions providing group insurance mentioned earlier. Each trustee (employer) is a policyholder of the group policy. The group policy must be for the benefit of the employees. Individuals who are eligible for coverage under the group policy are the employee group. The trustees establish which classes of employees are eligible for coverage under the group policy.

Federal Employees' Group Life Insurance (FEGLI)

Offers group term life insurance for federal employees, retirees, and their family members. Federal employees are automatically covered by basic life insurance, unless coverage is declined. Premiums are automatically deducted from the insured's paychecks. Federal employees pay 2/3 of the cost of premiums, and the government pays 1/3 of the cost. Three additional coverages are offered as a supplement to the Basic, which are optional.

Adverse Selection w/ Group Insurance

Adverse selection is reduced in group insurance for several reasons. First of all, the group exists naturally. This is crucial because groups that exist only for the purpose of obtaining insurance are more than likely to contain a large number of individuals who are sick or approaching death. These individuals increase adverse selection. Groups can further reduce adverse selection by assuring that as many individuals as possible are eligible for coverage (the law of large numbers applies here). Benefits must be pre-established so that poor risks do not seek out more insurance coverage. Second, member turnover is favorable since younger people pose less of a risk than older people. For example, a group that consists of mostly 70-year olds poses a great risk for the insurer, since all of these individuals are likely to have more age-related health issues, and are closer to death. Insurers look for a good balance of older and younger insureds. The insurer also wants to be sure that the group is financially solvent, so that it has continuous business with that group. For this reason, groups of seasonal employees are less likely to be insured compared with groups of permanent employees.

General Characteristics

Group insurance provides insurance for many people under one master contract. The group is underwritten as a whole, not each individual. Each member insured under the group plan is issued a certificate of insurance as evidence of coverage. Members insured under the group plan are not party to the contract, only the insurance company and the group entity are. Group insurance, as compared to individual insurance policies, has the following distinctions: - More people are covered by a group plan through their employer than by an individual insurance plan - It is typically easier to qualify for a group plan than an individual plan - The unit cost for group insurance is generally less than for a comparable individual plan - Groups must exist for reasons other than simply to obtain insurance coverage. In addition, groups must have a minimum number of enrollees due to the fact that larger groups provide better loss projection. Almost half of all life insurance issued is group life. Group life is differentiated from individual life in that enrollees typically do not have to provide evidence of insurability, are not issued individual policies, and do not own the contract. Group life insurance is either contributory or noncontributory. With a noncontributory plan, the employer pays the entire cost of premiums. With a contributory plan, the group members share the cost of the coverage with the employer

Group Permanent Life

Though less frequently used, group whole life offers permanent protection for insured members under the group. The types of group whole life used most often include group ordinary, group paid-up, and group universal life. A group ordinary plan is any group life plan that builds cash value. The employer pays for the insurance portion of the policy in a group permanent plan. In most policies, the cash value is owned by the employee, while in some, if the employee terminates employment, the cash value is forfeited. Group paid-up combines term and whole life. The employer pays the term insurance. The employee purchases single-premium whole life. The combination of the employer-purchased term life and employee-purchase whole life equals the policy's face amount. With group universal life insurance, employees pay the majority of policy premiums and, therefore, have specific rights of ownership that are not provided in group ordinary insurance.

Group Underwriting Considerations

When insurers underwrite group coverage, the following are important considerations: Groups are underwritten as a whole, not based on individual members within the group. Groups are selected and rated based on the group's average age, proportion of men to women, and occupation. Insureds under a group policy are typically classified according to their employment (e.g. full-time, part-time, seasonal, salaried, etc.). By classifying employees, the employer decides which class of employees is eligible for coverage. Seasonal and part-time employees are typically not eligible. With individual policies, insureds are classified according to their individual risk classification (preferred, standard, substandard, declined). Applications are brief and include: the applicant's name, social security number, residential address, any dependents, and named beneficiaries. Applicants usually do not have to undergo a medical exam, unlike some individual plans. Group size - larger groups provide better loss predictions. Constant flow of members joining and leaving the group is desirable for insurers since younger members pose a lower risk than older members. The group's ability to pay premiums and renew coverage impacts policy issuance - called persistency. In the case of group employer plans, employers are required to pay at least some portion of the premiums; therefore, the group policies are likely to be kept in force. Each individual enrollee does not have to prove evidence of insurability, unless enrolling after the group enrollment period. Insureds under a group policy are typically classified according to their employment status. By classifying employees, the employer decides which class/classes of employees are eligible for coverage. While employees can be classified by their job responsibilities, union or non-union status or department, employees may not be classified based on their sex or age.

Employer Groups

Employer groups are the most common groups to obtain group insurance coverage. The employer is the policyowner and is issued the master policy contract. The employer group consists of any eligible employees. The employer decides which classes of employees are eligible for coverage under the group policy. In most cases, this includes all full-time employees, including the employer. The employer is permitted to exclude certain classes of employees, such as those who work part-time. Part-time employees are typically not eligible to join the employer group. The employer may include retired employees as a class of eligible insureds.

Premiums for Group Insurance

Group insurance premiums are in many cases lower than those that can be obtained on individual policies because of the lower cost of effectuating the policy - recall that group contracts are underwritten collectively, not individually. There are two ways of rating group policies: 1. experience rating and 2. community rating. The experience rating establishes group premiums on the group's prior claims history. Experience rating more accurately rates the group; however, groups with more claims will inevitably pay higher premiums. With community rating, premiums are based on the actual or projected costs of insureds in a particular geographic location with reference to insureds' age, gender, occupation and health. With community rating, each member pays the same premium.

Taxation of Group Life Plans

Premiums for group life insurance paid by the employee are not tax-deductible, but the employer can deduct premiums it pays as a business expense. 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.

NAIC Model Group Standard Provisions

The following standard provisions are based on the NAIC Model for group life insurance. Keep in mind some states may vary slightly. Most group life policies have the following: - Grace period of 31 days 1- or 2-year contestability period from the date the insured's coverage took effect - The entire contract consists of the policy and attached application - Individual employees or members are issued certificates of coverage under the master contract - Misstatement of age provision - Evidence of insurability must be provided if an eligible individual for coverage enrolls after the enrollment period - Conversion right - Insureds statements in application are representations - Facility of payment

Labor Union Groups

The labor union is the policyowner and holds the master contract. In order for a labor union to be eligible to provide group insurance to its employees, it must meet the following requirements: - Organized into a group naturally (for purposes other than simply to acquire insurance coverage) - Possess a constitution and bylaws - Group coverage is intended for the benefit of members, not the labor union - Most labor unions do not provide group insurance due to the Taft-Hartley Act, which forbids employers from directing money into the union for the sole intent of providing labor union members with insurance. - Furthermore, most states require that employers pay at least some portion of the cost of insurance premiums.

NAIC Legal Requirements for Groups

There are a set of legal requirements that have been established for group life insurance based on the NAIC model. All group life coverages must meet the following in most states: - Group life master contracts must cover at least 10 individuals. In some states, this minimum is lower; - The group life contract must be established by an eligible group, such as an employer or an association; - The group life coverage must be established for the benefit of the insured individuals; - Individuals applying for coverage do not have to undergo a medical examination; - Premium rates are based on the claims experience of the entire group, not each individual, and the master contract holder must pay for at least a portion of the premiums, but is permitted to pay the entire cost of premiums. Family groups that are established for the purpose of buying life insurance do NOT qualify for group life insurance policies.