AD Banker Life and Health Chapter 6 Terms/Definitions

Characteristics of Eligible Employee groups in California

-Covers not less than 2 public or private employees and will terminate if coverage falls below 2 lives -Issued to the employer with premiums being paid by the employer, employee, or jointly -Insures either all employees or all classes of employees as determined by conditions pertaining to employment -Written for the benefit of someone other than the employer, such as a trustee representing the employees and dependents -When written on a contributory basis, the benefits must be offered to all eligible employees -May be issued with or without a medical examination -Cannot provide for the employer to be named as beneficiary of the employee's policy

Group Policy Provisions

-Incontestability -Misstatement of Age -Exclusions for War, Military, and Aviation Risks -Facility of Payment

Types of Social Security Benefits

-Retirement -Death Benefits -Disability Income Benefits -Survivor Benefits

Credit Life Insurance (Individual and Group)

-Typically issued in the form of a group term life policy, and covers only the outstanding obligation of the insured debtor. The premium is either paid for by the debtor or the creditor. -Usually optional, but could be a standard requirement of the lender for all borrowers in order to qualify for a loan. -Coverage tends to be single premium decreasing term, with the cost of the policy added to the amount borrowed -The borrower is free to obtain coverage from any admitted insurer. -The creditor will be the irrevocable beneficiary, and in the event of the insured's death, the proceeds must be used to extinguish the debt. If the debt or policy is cancelled early, unearned premium must be refunded.

Misstatement of Age

A group policy must contain a provision allowing for the adjustment of premium or amount of insurance payable in the event of a misstatement of the age of an employee. A death claim payable for an insured whose age was misstated will be adjusted in relation to the misrepresentation, but does not affect the benefit payable for any other insured.

Social Security Survivor Benefits

A monthly Survivor Benefit is payable to eligible dependents of a currently or fully insured deceased worker. A surviving spouse with a dependent child is entitled to monthly income until the youngest child reaches age 16 (or a disable child reaches age 22). Once the youngest child reaches age 16, the surviving spouse's benefits stop. An unmarried surviving spouse may start receiving retirement benefits at age 60. The blackout period is the time between when the youngest child reaches age 16 and the spouse is eligible for retirement benefits at age 60. Surviving children of a deceased worker are eligible for benefits and covered to age 18 or 19 if still enrolled in high school. Beginning at age 62, surviving parents are also eligible for monthly survivors benefits if being at least one half supported by the deceased worker.

Supplemental Executive Retirement Plan (SERP)

A nonqualified deferred compensation plan that allows employers to provide additional retirement income to key, highly compensated employees beyond the benefits of traditional retirement plans.

Social Security Death Benefits

A one-time lump sum payment of $255 may be made after the taxpayer's death. This death benefit is only payable to a surviving spouse or minor children.

Entity Plan

A type of buy-sell agreement in which a business entity buys life insurance policies on each of the partners so if one dies the company would have the funds to buy the deceased's interest in the company. The entity would then name itself as the beneficiary of each policy.

Cross Purchase Plan

A type of buy-sell agreement used when the partners of a business purchase life insurance on each other. At the death of one of the partners, policy proceeds are used to purchase that person's interest in the business from his/her heirs. Each partner owns insurance on each of the other partners.

Group conversion

Allows an employee who loses eligibility for enrollment in a group plan to get coverage under an individual plan without evidence of insurability

Salary Continuation Plan

An agreement by an employer to continue a key employee's salary upon retirement, death or disability as long as the employee continues employment during the term of the agreement.

Exclusions for War, Military, and Aviation Risks

An employer group policy may provide for the exclusion or limitation of coverage for losses arising from conditions relating to war, military service, or aviation exposures.

Nonqualified Deferred Compensation

An incentive plan in which an employer promises to pay highly compensated employees the full value of their voluntary salary deferral at a defined future point in time. Income taxes are deferred until the employee takes possession of the incentive funds. The employer is both the policyowner and the beneficiary.

Retirement Social Security Benefit

At Full Retirement Age, a retired worker is eligible to receive monthly income equal to his/her PIA. The Full Retirement Age (FRA) varies based on year of birth but is up to age 67. Covered workers may begin receiving retirement benefits as early as age 62, however benefits will be permanently reduced. Delaying benefits beyond FRA will increase future benefits. Social Security retirement benefits may be modified each year for Cost-Of-Living Adjustments. Retirement benefits are also payable to qualified dependents of a covered or deceased worker.

Replacement Coverage

Benefits provided by a succeeding carrier.

Buy-Sell Agreement

Business Life Insurance. Contractually establishes the intent to purchase, at a predetermined value, the assets of a business if one of the contract participants (such as a business partner) predecease the others.

Master policy

Contract issued to plan sponsor

Key Person (Key Employee)

Employee(s) whose contributions have a significant impact on the revenue and profitability of the company, especially in small businesses. The employer is the owner AND beneficiary. The policy is designed to protect the business so it has the funds to recruit, hire, and train a replacement employee, restore lost profits, and reassure customers that the business operations will continue.

Contributory Plan

Employees pay a portion of the premium and at least 75% of eligible employees must participate

Contributory Employer-Employee Plan

Employees will be required to pay up to 100% of the premium payments, and at least 75% of all eligible employees must participate.

Noncontributory plan

Employer pays the entire premium and 100% of eligible employees must participate

Noncontributory Employer-Employee Plan

Employer pays the entire premium and 100% of the eligible employees must be covered. The percentage participation requirements are used to reduce adverse selection.

Methods of determining group insurance benefits

Flat benefit (all employees receive the same insurance amounts) Based on a percentage of income (employees receive 100%, 150%, or 200% of their annual base wage, subject to imputed income) Based on one's position in the company (the employer may establish different benefits for specific classes of employees, but may not discriminate between employees in the same class)

Natural group

Formed for a purpose other than for purchasing group insurance

Social Security System Funding

Funding is provided by both employee and employer through Federal Insurance Contributions Act (FICA) withholding. Based on one's taxable income and number of years in the workforce, each covered employee earns credits toward fully insured status and entitlement to Social Security benefits. The credits are based on annual income and allow a worker to accumulate up to four credits, or quarters of coverage, per year. Once eligible, the amount of monthly Social Security benefits is calculated according to a basic formula which determines each covered worker's Primary Insurance Amount (PIA).

Types of Group Plan Sponsors

Group plans may be sponsored by employers, associations, debtors, labor unions, or trusts. The most common type of plan sponsor is an employee group. The employer may be a partnership, a corporation, or a sole proprietorship.

Blanket Life Insurance

In California, a life insurer may issue blanket life insurance policies for a term not exceeding 1 year with premium rates less than the usual rates for such insurance as approved by the Commissioner.

Late enrollees

Individuals who do not join the group plan when eligible and who may be required to provide evidence of insurability or forced to wait until the next open enrollment period

Certificate of Insurance

Issued to each participant and describes the benefits of the policy

Social Security Disability Income Benefits

Pays monthly disability income benefits to a qualified worker once they become eligible based on the Social Security definition of a disability. The individual must be unable to perform the duties of ANY occupation for 5 months before applying for benefits. This waiting period is not retroactive. Once approved, benefits will be payable in the 6th month until the injured worker qualifies for retirement benefits.

Social vs. Private Insurance

Social insurance is designed to provide basic benefits that an insured can build upon. It is not designed to replace private insurance, but to supplement it. Contributions to private insurance plans are voluntary, whereas participation in Social insurance plans are mandatory in most cases.

Extension of Benefits

The continuation of coverage under a particular benefit provided under a policy following discontinuance with respect to an employee or dependent who is totally disabled on the date of discontinuance.

Facility of Payment

The insurer may pay to a relative or anyone it deems entitled to the benefits in the absence of a designated beneficiary.

Currently Insured Status

The minimum requirement for workers under age 24 to obtain a currently insured status for disability benefits is to earn at least 6 quarter credits in the last 3 years (13-quarter period). Beginning at age 24, additional credits are required, based on the worker's age at the time of disability, to obtain currently insured status.

Group Underwriting

The underwriter's greatest concern for a group plan is adverse selection. To help protect against preexisting conditions and immediate claims, group plans have a probationary/waiting period between when an individual joins the group and can enroll in the group plan. If enrolled in the initial eligibility period (usually the first 30 days of employment), coverage is guaranteed and evidence of insurability is not required. Late enrollees may be required to provide proof of insurability or be forced to wait until the next annual open enrollment period. Open enrollment periods are offered on an annual basis which allows individuals to enroll without evidence of insurability or to make changes. An individual can make changes at any time if they have a change in status, such as adding an eligible dependent or change in employment status, such as going from full- to part-time employment. The cost of the plan is determined by the average age, size, industrial classification (nature of the work involved), experience rating (the group's claims) and the personnel turnover history of the group. These factors are more important than the actual overall health of the group.

Incontestability

The validity of the policy cannot be contested, except for nonpayment of premiums, after it has been in force for 2 years. Each new insured added after the group policy is issued is subject to his/her own 2-year period of contestability based on enrollment application information

Group Conversion

There is a conversion period of 31 days in which the employee may, upon termination of eligibility and without evidence of insurability, convert his/her group life insurance benefit to an individual permanent policy. The conversion period is also a grace period.

Open enrollment

Time period any eligible person can join the group plan and coverage is guaranteed without evidence of insurability

Annual renewable term

Type of insurance written for group plans

Fully Insured Status

Usually 40 quarters/credits or 10 years of Social Security-covered employment. A fully insured worker has permanent coverage under Social Security and cannot lose this status. Benefits: -Retirement income at age 62 or older -Spousal retirement at age 62 or older -Widows and widowers can begin receiving Social Security benefits at age 60 -Disability and survivor's income benefits -Premium-free Medicare Part A

Third-Party Ownership

When a policy is owned by a person other than the insured. The three parties involved are the policyowner, insured, and insurer. Examples: A husband owns a policy on a wife A parent owns a policy on one of his/her children A business owns a policy on a key employee A business partner owns a policy on another business partner

Split-Dollar Plan

When the employer funds the cash portion of a whole life plan and the employee funds the term part of the plan -at death, employee receives death benefit and employer receives cash value of plan

Group Life Insurance

life insurance that provides a master policy for a group; each eligible group member receives a certificate of insurance