XCEL Chapter 6: Group Life Insurance

Eligibility of group members (employees)

* Employee must be full time and actively working * If contributory, employees must approve of automatic payroll deduction * New employee probationary period is usually 1 to 6 months * The employee has 31 days during the enrollment period to sign up, otherwise they may need to provide evidence of insurability

Classifications of risk

After all necessary info 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.

Contributory & Noncontributory Plans

Contributory - An employee group plan in which employees share the cost. Insurance company requires that at least 75% of all employees participate. Noncontributory - An employee group plan in which employees do NOT share in the cost. Insurance company requires that 100% of all employees be eligible.

Blanket life insurance

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

Taxation of group life insurance plans

For a group life insurance plan to receive favorable tax treatment, there are certain requirements in place. This makes sure that the average employee is not discriminated against in favor of higher level employees. Determining eligibility: Must benefit at least 70% of all employees. At least 85% of all participating employees must not be key employees. Premiums for group life insurance: If paid by the employee are not tax-deductible. However, if the employer pays, it can deduct the 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.

Types of group life insurance plans

Group Term Life: Life insurance is normally offered as a guaranteed annual renewable term policy. The policy is issued for one year and may be renewed annually without evidence of insurability at the discretion of the policyowner. Group Whole Life: Though not as common, group whole life offers permanent protection for insured members under the group. Note: The most common types of Group Permanent (whole life) plans are: Group Ordinary, Group Paid-Up, and Group Universal Life Dependent Coverage: Most group life insurance policies cover the member's dependents, as long as the amount of coverage does not exceed 50% of the insured member's coverage.

Eligible groups

Group life insurance can be formed by the following as well as other organizations, just as long as they are formed for a reason other than to purchase insurance. There is no minimum # of members required for group life insurance. * Single-employee groups * Multiple-employee groups * Labor Unions * Trade Associations * Credit/Debit groups * Fraternal Organizations * Trustee Groups (Established by two or more employers or labor unions)

How benefits are determined

Most employers will establish benefit schedules according to the following: * Earnings * Employment position * Flat benefit Conversion to Individual Policy: If a member's coverage is terminated, the member and his dependents may convert their group coverage to individual whole life coverage, without having to show proof of insurability. Conversion Period: An individual must apply for individual coverage within 31 days after the date of group coverage termination. An individual is covered under the group policy during the conversion period. Group Policy Termination: If the master policy is terminated, each individual member who has been insured for at least 5 years is permitted to convert to an individual policy, providing coverage up to the face value of the group policy.

Group permanent life

Some group life plans are permanent (whole life) plans, using some form of permanent or whole life insurance as the underlying policy. The most common types of permanent group plans are group ordinary, group paid-up, and group universal life.

Group credit life

These are set-up by banks, finance companies, etc. in case the insured dies before a loan is repaid. Policy benefits are paid to the creditor and used to settle the loan balance. The premiums are usually paid by the borrower. A decreasing term policy is commonly used.

Franchise life insurance

This is used where participants are employees of a common employer 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 will be issued an individual policy which 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.

Features of group insurance

features that separate group insurance from individual insurance: 1. the individual does not have to provide evidence of insurability- group underwriting is involved 2. are not issued as individual policies- master contracts are issued instead 3. low cost due to lower administrative, operational, and selling expenses associated with group plans 4. flow of insureds: entering and exiting under the policy as they join and leave the group 5. typically issued as level term insurance, which provides a fixed amount of coverage throughout the term of the contract