Chapter 13 Group Life Insurance

In most cases, it's possible to include the dependents of employees who are insured under a group life plan. Dependents may be any of the following: The insured's spouse The insured's children The insured's dependent parents Any person for whom dependency can be proven

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All states define a true group as having at least 10 people covered under one master contract. Some states make allowance for even smaller groups. Group life insurance includes the following characteristics. Insurance coverage must be incidental to the purpose of the group. Beneficiaries are covered under a master contract. Beneficiaries receive an individual certificate. Plans can be contributory or noncontributory. Beneficiaries are underwritten as a group. Beneficiaries have the right to conversion privileges.

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Group life insurance coverage must be incidental to the purpose for which the group has been formed. This means that a group may not be formed for the specific purpose of providing insurance coverage for its members. For example, a group of sick people would not be considered a legally acceptable group because the main purpose of the group is to purchase insurance. Examples of legally insurable groups include the following: Single-employer groups Labor unions Trade associations Creditor and debtor groups Fraternal organizations Group life insurance coverage is generally issued without evidence of insurability being required by the individuals making up the group (though sometimes plans do require such proof). The employer is the policyowner and pays the premium and receives the master contract. Most group life policies are written as term insurance. The employee does not receive a policy and instead receives a certificate of coverage that verifies that life insurance protection is in force.

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Group life insurance policies must include a conversion privilege that gives insured members the right to convert to an individual policy upon termination of the master policy, upon the loss of group coverage due to termination of employment, or upon the loss of eligibility on the part of a class of insureds (such as "all part-time employees"). This option guarantees the member that coverage will continue for 31 days after leaving the group. The member can convert to any type of insurance except term insurance; the policy premiums will be based on the attained age of the member. If the member dies during the conversion period, the insurer will pay the death benefit in full. No proof of insurability is required when a conversion takes place. If the master contract is terminated, every individual who has been covered under the plan for at least five years will be allowed to convert to individual plans. The converted policy must have the same coverage amount as the group policy.

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In group insurance, the policy is evidence of a contract between the insurer and the employer or association (the policyowner). When an employee becomes covered by a group life plan, the employer, as the master policyowner, retains the life insurance policy. As proof of protection, the employee receives a form that certifies the coverage, the benefits under the plan, and the beneficiary's name. Because it certifies or states all these things, it is called a certificate of insurance.

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Most states have enacted standard provisions for group policies, including the following: Grace period (usually 31 days) Incontestability (usually one or two years after the policy becomes effective, two years from the insured's effective date of coverage) Entire contract (the application must be attached to and made part of the contract) Evidence of insurability (individual insurability must be proven if the employee or member joins the plan after the enrollment period) Misstatement of age (premium is adjusted to the correct age; under individual insurance benefits are adjusted) Facility of payment (allows partial payment of policy proceeds to a close relative or friend if no beneficiary is named or living to cover final expenses) Conversion (the right to convert to an individual policy when the insured's coverage is terminated or the master policy is terminated) Individual certificates (issued as evidence of coverage) Minimum number (a minimum number of group members is required)

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Contributory versus noncontributory plans refers to which party or parties will pay the group life insurance premiums. If the employer pays the entire premium, the plan is noncontributory. If the employee pays part of the premium (the premium is shared by both the employer and employee), the plan is contributory. In a noncontributory plan (non-participating), the group contract must cover 100% of the eligible persons in the group. If the plan is contributory (also known as participating), at least 75% of the eligible employees must be covered before the plan can become effective. For example, if 500 employees are eligible for a contributory group plan, at least 375 would have to enroll in the plan for it to be effective. Under contributory plans, the period of time during which the employee may enroll and receive coverage without evidence of insurability is known as the eligibility period. Eligibility of Group Members By its very nature, group insurance provides for participation by virtually all members of a given insurance group. Whether or not an indi vidual member chooses to participate usually depends on the amount of premium that individual must pay (if the plan is contributory).

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Employers and insurers are allowed some latitude in setting minimum eligibility require ments for employee participants. For example, an employer might decide that employees must be full-time workers and actively at work to be eligible to participate in a group plan. A probationary period may be required for new employees, which means they must wait a certain period of time (usually one to six months) before they can enroll in the plan. The probationary period is followed by the enrollment period: the time during which new employees can sign up for the group coverage. If an employee does not enroll in the plan during the enrollment period (typically 31 days), she may be required to provide evidence of insurability if she wants to enroll later. This is to protect the insurer against adverse selection.

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Five main types of group life insurance are marketed to eligible groups: group term life, group permanent life, group creditor life, group paid-up life, and group survivor income benefit insurance. Group insurance is also written to include the dependents of the group members. One disadvantage of group life insurance is that it is usually only temporary coverage, and an individual member of the group may lose that coverage when that individual leaves the group. To lessen this disadvantage, group term policies must include provisions to provide for conversion to individual coverage. They also may include continuation of insurance provisions and waiver of premium provisions. Some employers continue group term insurance at reduced amounts for retired workers.

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