Group and Business Life Insurance Policies

Executive bonus

plans are used by employers that want to offer bonuses to some valued employees without offering the same plan to all employees. In this plan, the employee would buy a permanent life insurance policy, insuring his own life, under a scenario where the employer will then either: pay the employee a cash bonus to cover the premium cost; or pay the premium directly to the insurer. The employer can deduct the bonus or the premium as a business expense and cannot be named the beneficiary of the policy's proceeds. However, since this plan is only for certain employees, it does not meet IRS requirements regarding discrimination and does not qualify as a tax-qualified plan. As a result, the amount paid by the employer is taxable as income to the employee. For Example After taking an insurance class, Barry agrees to provide Harry, his employee, with an executive bonus plan. All Harry has to do is buy a whole life policy insuring himself, and Barry will give him a bonus in an amount equal to the insurance premium. Barry is able to deduct the bonus as a business expense, but Harry must treat the bonus as income and pay tax on it at the ordinary rate.

Business continuation insurance

is used to provide funds to keep a business going if an owner, partner or stockholder dies. The funds can be used by the heirs of the deceased to operate the business or by another person to purchase the business from those heirs under the terms of a buy-sell (or buyout) agreement.

Life insurance can be used to protect businesses. It can provide funds:

to persons for the purpose of buying and operating the business in the event of the death of the owner. to an owner so he can replace a key employee. to valued employees as fringe benefits.

In ABC's group life insurance plan, the employees contribute to the premium. This plan is called - "certified". - "contributory". - "convertible". - "noncontributory".

- "contributory" In a contributory plan, employees contribute a portion of the premium. 75% of the eligible employees generally must participate.

In XYZ's group life insurance plan, the employer pays the entire premium. This plan is called - "certified". - "contributory". - "convertible". - "noncontributory".

- "noncontributory". In a noncontributory plan, employees do not contribute a portion of the premium. The employer pays the entire premium. All eligible employees must be members, since the coverage costs them nothing.

What kind of life insurance is most widely used for group plans? - Deposit term - Decreasing term - Limited-pay life - 1-year renewable term

- 1-year renewable term Group life insurance is almost always 1-year renewable term. This results in: (1) Coverage for employees only as long as they are eligible, (2) Premiums which increase and decrease each year based on the average age and the sex of members, (3) No cash value, and (4) No settlement options (lump sum settlement only).

What percentage of eligible employees must participate in a noncontributory group plan? - 50% - 75% - 100% - It varies based on the size of the group.

- 100% In a noncontributory plan, employees do not contribute a portion of the premium. The employer pays the entire premium. All eligible employees must be members, since the coverage costs them nothing.

In a group life plan there is usually a probationary period of _____ days. - 0-30 - 30-60 - 60-90 - 90-120

- 60-90 Since many new employees will not stay with a company, there is usually a probationary period before an employee is eligible for group coverage. This period is generally 90 days.

What percentage of eligible employees must participate in a contributory group plan? - 50% - 75% - 100% - It varies based on the size of the group.

- 75% In a contributory plan, employees contribute a portion of the premium. 75% of the eligible employees generally must participate.

E buys a key-employee insurance policy insuring the life of his employee, G. The beneficiary is - E. - G. - G's estate. - G's beneficiaries.

- E "Key employee" insurance is insurance on the life of a key employee. It is purchased and owned by the employer. Therefore, it is an asset of the employer. The cash value can be used by the employer as collateral for a loan. The employer is also the beneficiary. If the employee dies, the employer receives the proceeds and is free to use them as it wishes. Presumably, the proceeds would be used to hire and train replacements and continue the business until the replacements may bring the business back to its position before the employee's death, but this is not required.

Which of the following are NOT eligible for a group life insurance plan? - Employer-employee groups. - Groups formed in order to obtain insurance. - Labor organizations. - Multiple employer trusts.

- Groups formed in order to obtain insurance. A group plan may be written for a group formed for some purpose other than to obtain insurance.

G owns a veterinary clinic. G employs two doctors, although G is not a doctor himself. G is worried his income would suffer if something happened to his staff. What program should he establish? - Key person - Split dollar - Executive policy - Capital retention

- Key person Key person insurance pays the employer in the event of death of an insured key employee.

Which of the following is true of group life insurance? - Premium payments are less frequent than for individual life. - It is usually more expensive. - Proof of insurability is usually not required. - It usually has settlement options and cash value accumulations.

- Proof of insurability is usually not required. Group life differs from individual life in that group is usually less expensive, the employee is usually not required to provide proof of insurability, the employer pays all or part of the premium, usually only a lump sum settlement is provided, and it is usually 1-year annual renewable term with no cash value build-up. There is no difference in the frequency of premium payments.

Under a group life insurance plan, each employee receives a(n) - individual policy. - certificate of insurance. - insurance statement. - group policy.

- certificate of insurance. In a group plan, each covered employee receives a certificate of insurance as proof of insurance. The certificate shows the benefits and the name of the beneficiary.

A certificate of insurance does all of the following EXCEPT - provides proof of coverage. - shows the beneficiary's name. - shows the amount of coverage. - contains all policy conditions.

- contains all policy conditions. In a group plan each covered employee receives a certificate of insurance as proof of insurance. The certificate shows the benefits and the name of the beneficiary. The master policy contains the policy conditions.

The beneficiary of an employee's group life insurance coverage may NOT be the insured's - employer. - spouse. - parents. - children.

- employer. The employer signs the application as the applicant for the policy. As he becomes the policyowner, he receives the master policy and pays the premiums. The employee fills out an enrollment card to indicate he wants coverage and selects the beneficiary. Anyone other than the employer may be the beneficiary.

Under a contributory group life insurance plan, an employee - cannot convert to individual insurance when he leaves the group. - doesn't need permanent insurance. - may have his dependents covered only if they are insurable. - generally pays lower premiums than for comparable individual insurance without evidence of insurability.

- generally pays lower premiums than for comparable individual insurance without evidence of insurability. Under most contributory plans and noncontributory plans, evidence of insurability is not required, yet the premium is less than that charged for individual coverage because of lower administrative expense for the insurance. Choice "A" is false, as state law requires insurers to offer individual conversion policies to persons leaving the group. Choice "B" is false as group insurance is term coverage. It provides no living benefits and does not help to create an estate in the insured's later years. Choice "C" is false as plans which provide for dependents to be included allow dependents to be covered under the same conditions as for employees. However, the amount of coverage is less (the maximum amount that can be provided without tax consequences is $10,000 for the employee's spouse and $2,000 per dependent child). Dependents have the same conversion rights as employees.

D buys a key-employee insurance policy insuring the life of his employee, G. Under this policy, all of the following describe D EXCEPT - he is the policyowner. - he is the beneficiary. - he is the insured. - he controls the use of the cash value.

- he is the insured. "Key employee" insurance is insurance on the life of a key employee. It is purchased and owned by the employer. The employer is also the beneficiary. If the employee dies, the employer receives the proceeds and is free to use them as it wishes. Presumably the proceeds would be used to hire and train replacements and continue the business until the replacements may bring the business back to its position before the employee's death, but this is not required

Premiums for 1-year renewable term group life insurance - increase each year. - decrease each year. - remain the same each year. - increase or decrease each year based on the average age of the group.

- increase or decrease each year based on the average age of the group. Group life insurance is almost always 1-year renewable term. This results in: (1) Coverage for employees only as long as they are eligible, (2) Premiums which increase and decrease each year based on the average age and the sex of members, (3) No cash value, and (4) No settlement options (lump sum settlement only).

Key-employee insurance - pays benefits to the insured's dependents. - is controlled by the key employee. - proceeds must be used for a specified purpose. - is owned by the employer but insures the life of an employee.

- is owned by the employer but insures the life of an employee. "Key employee" insurance is insurance on the life of a key employee. It is purchased and owned by the employer. The employer is also the beneficiary. If the employee dies, the employer receives the proceeds and is free to use them as it wishes. Presumably the proceeds would be used to hire and train replacements and continue the business until the replacements may bring the business back to its position before the employee's death, but this is not required

S wants to join his employer's contributory group life insurance plan. However, S failed to apply during the eligibility period. As a result, S - will pay a higher rate if he applies later. - cannot apply for at least 6 months. - may be required to take a medical exam to join later. - loses the right to ever apply.

- may be required to take a medical exam to join later. In a nonmedical contributory plan, an employee must apply during a specified eligibility period (generally 30 days). If he does not, the insurer may require him to take a medical exam if he wishes to join the plan later.

To guard against adverse selection, insurers use all of the following as underwriting controls in the writing of group life insurance EXCEPT - medical examinations required for borderline risks. - all or most of a large group required to be insured. - group benefits determined by formula rather than by individual selection. - coverage required to be incidental rather than the reason for formation of the group.

- medical examinations required for borderline risks. Either medical exams are required for all members or they are required for none. Generally, none are required unless a person applies after the eligibility period expires. Insurers do require all or most of the eligible group to be insured, that group coverage be incidental to the job, and that benefits be based on certain formulas so that higher-risk members do not have the option to purchase greater amounts of coverage.

In an employer group, the employer will be the plan sponsor. He will:

- sign the application as applicant for the policy. - become the policyowner and hold the master policy. - pay the policy premiums. - maintain enrollee records. Premiums are based on the average age and gender make-up of the group but may be adjusted based on the amount of claims submitted by the group ("experience" rating.)

All of the following statements pertaining to the conversion privilege of group term life insurance are true EXCEPT: - when a group plan is terminated, the members can convert to individual term policies. - a covered individual may exercise the conversion privilege without proof of insurability. - an insured employee typically has 31 days following termination of employment in which to convert to individual insurance. - insureds who convert their coverage to individual policies pay a premium rate according to their attained age.

- when a group plan is terminated, the members can convert to individual term policies. When the insured leaves a group, he may convert coverage to an individual policy without evidence of insurability within 31 days. The premium would be based on his attained age. The coverage may be any type of insurance except term.

review 3

A key employee, or key person, life insurance policy is used to insure a person whose contributions to the business are considered essential. The employer is the policyowner, and it has complete control of the policy and its cash values and pays the premiums (NOTE: They are not tax deductible as a business expense). The employer is also the beneficiary of the policy. As such, if the key employee dies, the employer gets the proceeds of the policy without any restrictions on how to apply them. Since the premiums were not deductible as a business expense, the proceeds are not taxable as income to the employer.

Probationary Period

After an employment ____________________ generally 60 to 90 days from the time he starts work for the employer and before he is eligible for coverage, an employee may fill out an enrollment card to indicate he wants coverage and to select the beneficiary. Anyone other than the employer may be the beneficiary. If the plan allows it, the employee may also have his dependents covered under the same conditions required for him. For Example When Caster went to work for Thumbs-Up Sausage, he was told he would be eligible for its group life insurance coverage after a 90-day probationary period. Thumbs-Up Sausage would be the policyowner and hold the master policy, and Caster would get a certificate showing he had the coverage. That way his wife, Lani, would know she was entitled to the $10,000 benefit if he died.

Group life insurance

Any life insurer may issue life, disability, term, and endowment insurance on the group plan, with or without annuities, and with premium rates less than the usual rates for such insurance. Group life insurance is a third party-owned contract and is insurance most often sold to an employer to cover the lives of its employees or to a creditor to cover the lives of debtors. The group policy is a master policy, issued to the policyowner (e.g., an employer or creditor), containing the policy conditions. The persons who are insured (e.g., employees or debtors) receive certificates that: - provide them with evidence of coverage. - show their benefits under the policy. - identify the beneficiary.

review 2

Because of the limited underwriting, group life insurers must be wary of adverse selection. Adverse selection exists when people who expect to die prematurely are buying the life insurance, while those who expect to live longer are not. To avoid adverse selection, insurers require that the insurance must be incidental to the group and not the main reason for the group's existence. In addition, a certain percentage of eligible members must enroll and there can be no individual selection of coverage. In a contributory plan, the employees contribute to the premium payment. Generally, 75% of eligible employees must participate in the plan. In a noncontributory plan, the employees do not contribute to the premium payment; the employer pays the entire premium. 100% of the eligible employees must be members since the coverage costs them nothing. Group life insurance is not subject to COBRA continuation, therefore an individual insured under a group policy may convert his coverage to an individual policy when he terminates his group membership. In most instances, he has 31 days to convert without evidence of insurability. If the insured dies during the conversion period, it is presumed he would have converted the coverage. With that presumption, the death is covered by the group policy for the maximum amount to which the insured could have converted had he chosen to do so. In a conversion, the insured would convert his group term insurance coverage to an individual permanent insurance policy issued by the same insurer. An individual conversion policy is permanent insurance, may not have a face value that is more than the face value of the group policy and has a premium based on the insured's attained age.

Adverse selection

Because of the limited underwriting, group life insurers must be wary of adverse selection. __________________________________ is when people who expect to die prematurely are buying the life insurance, while those who expect to live longer are not. To avoid adverse selection, insurers require that: -the insurance must be incidental to the group (i.e., the group must have been formed for some purpose other than to obtain insurance [e.g., an employer group, multiple employer trust, labor organization or debtor and creditor group]). -there must be a steady flow of members in and out of the group. the group must be large enough to average out the risk. Insurers usually require at least 10 persons be insured in an employee group and 25 persons be insured in other types of groups. a certain percentage of eligible members must enroll (see below). there can be no individual selection of coverage.

Cross-Purchase Plan

Cross-Purchase Plan A buy-sell agreement used by a partnership can be either a cross-purchase plan or an entity plan. With a cross-purchase plan, each partner agrees to buy a portion of the interest of any other partner in the event of his death. The funds necessary to do this derive from insurance policies purchased by each partner covering the lives of the other partners and under which the purchaser is the beneficiary. Because of the number of policies required, this would not be a suitable option for large partnerships. For Example Dell, Lea and Meadow are each one-third partners in Goin' to Seed, a partnership which, at one time, was worth $500,000 but is now worth $300,000. They are exploring their options for buyout funding. If they enter into a cross-purchase plan, they will need six policies. Dell will buy $50,000 policies on Lea and Meadow; Lea will buy $50,000 policies on Dell and Meadow; and Meadow will buy $50,000 policies on Lea and Dell. Each will be the beneficiary of the policies they own. If one of the partners dies, the other two will each receive $50,000 to buy out half of the deceased partner's interest from his heirs.

review 1

Group life insurance is insurance most often sold to an employer to cover the lives of its employees or to a creditor to cover the lives of debtors. The group policy is a master policy, issued to the policyowner (e.g., an employer or creditor), containing the policy conditions. The persons who are insured (e.g., employees or debtors) receive certificates that provide them with evidence of coverage, show their benefits under the policy and identify the beneficiary. In an employer group, the employer will be the plan sponsor. He will sign the application as applicant for the policy, become the policyowner and hold the master policy and pay the policy premiums. Premiums are based on the average age and gender make-up of the group but may be adjusted based on the amount of claims submitted by the group ("experience" rating.) After an employment probationary period, generally 60 to 90 days from the time he starts work for the employer and before he is eligible for coverage, an employee may fill out an enrollment card to indicate he wants coverage and to select the beneficiary. Anyone other than the employer may be the beneficiary. If the plan allows it, the employee may also have his dependents covered under the same conditions required for him. Most group insurance is annual renewable term with features that include coverage for group members as long as they are eligible, but not after they leave the group. Premiums will increase and decrease each year based on the average age and sex of the members in the group. There is no cash value in a group policy and no settlement options. As such, any claims are paid in a lump sum only.

Group life insurance is not subject to COBRA continuation

Group life insurance is not subject to COBRA continuation; therefore, an individual insured under a group policy may convert his coverage to an individual policy when he terminates his group membership. In most instances, he has 31 days to convert without evidence of insurability. If the insured dies during the conversion period, it is presumed he would have converted the coverage. With that presumption, the death is covered by the group policy for the maximum amount to which the insured could have converted had he chosen to do so. In a conversion, the insured would convert his group term insurance coverage to an individual permanent insurance policy issued by the same insurer. An individual conversion policy: is permanent insurance. may not have a face value that is more than the face value of the group policy. has a premium based on the insured's attained age. For Example Dave has been covered by a $10,000 group term policy at his place of employment, Rehearsals, Inc., a specialty used-car dealership. He has been paying $5 per month for the coverage. Because of his unique sense of humor and outgoing nature, he has decided to quit selling cars and become a clown. He can convert his coverage to an individual $10,000 whole life policy without a medical exam, but his premium will jump to $20 per month based on his current age. He has 31 days to decide. If he should die during the 31-day conversion period, his beneficiaries would be paid $10,000 less any premium owing.

contributory plan

Group plans may be contributory or noncontributory. In a ________________________________, the employees contribute to the premium payment. Generally, 75% of eligible employees must participate in the plan. Medical exams will either be required for all members or required for none. Usually no exam is required unless a person applies for coverage after his eligibility period (i.e., open-enrollment) expires. In a contributory plan, the employee must apply during a specified eligibility period, usually 30 days in length; if he does not, the insurer may require him to undergo a medical exam if he wishes to join the plan later. Some plans may have an annual open enrollment. For Example After working at Thumbs-Up Sausage for the 90-day probationary period, Caster had 30 days to sign up for the firm's contributory group life insurance policy without a medical exam. When he forgot to submit the paperwork within the 30-day eligibility period, however, a doctor made him take a deep breath, say "Ah," and give blood before he could enroll.

noncontributory plan

In a noncontributory plan, the employees do not contribute to the premium payment; the employer pays the entire premium. 100% of the eligible employees must be members since the coverage costs them nothing. The employer will determine who is eligible for coverage based on criteria that would not be unfair to the insurer. The most common criteria for eligibility are: - length of service (i.e., years of employment); and - salary level (e.g., a person might need to earn $25,000 or more per year). Part-time employees are usually not eligible, and generally, there is no individual underwriting. For Example If Thumbs-Up Sausage had a noncontributory group life insurance policy, after a 90-day probationary period, Caster would automatically be enrolled in the plan, without a medical exam. Since his employer pays the entire premium, all eligible employees must be enrolled, and Caster would have no reason to not want the coverage.

annual renewable term

Most group insurance is _______________________ with features that include: -coverage for group members as long as they are eligible, but not after they leave the group. -premiums that will increase and decrease each year based on the average age and sex of the members in the group. There is no cash value in a group policy and no settlement options. As such, any claims are paid in a lump sum only. For Example Caster's coverage at Thumbs-Up Sausage is annual renewable term insurance. If he leaves the company, he will no longer be covered by the insurance and cannot obtain any cash value from the policy. The company's premium payments are relatively low, as employees do not stay long and, when they leave, are replaced by younger ones.

The basis for the premium

The basis for the premium is different for group insurance than individual insurance. Primary rating factors for individual insurance are the average age and gender of the employees insured in the group. With group insurance, the same rate is charged to all employees. This means the relative cost for group insurance is generally lower than that of comparable individual benefits. In addition, the expenses are lower because only one master policy is issued as opposed to many single policies.

Stock Redemption Plan

The same arrangements could be made involving a close (i.e., small, private) corporation. Stockholders could use a cross-purchase plan or a stock redemption plan. With a stock redemption plan, the corporation agrees to buy each stockholder's stock, purchasing insurance on their lives to fund the purchase in the same manner as an entity plan is used to purchase the interest of a deceased partner in a partnership.

Tax Implications

Under all business continuation insurance policies, premiums are not tax deductible and any proceeds are not taxable. The following is the key rule for taxes as they relate to insurance: When premiums are not tax deductible, the proceeds are not taxable. When premiums are deductible, the proceeds may be taxable. For Example Goin' to Seed cannot deduct the premiums paid for its policies. On the other hand, if one of the partners dies, the company will get $100,000 in tax free insurance proceeds to buy out the deceased partner's interest from his heirs.

Benefits are based on

certain formulas that may provide different levels of coverage for different classes of employees (e.g., different coverage amounts for rank-and-file employees, supervisors and executive personnel). However, the formulas do not allow selection of benefits on an individual basis. As such, higher-risk members cannot choose to buy greater amounts of coverage. Nor can higher-risk members be discriminated against in the offering of group insurance.

Blanket insurance

is a form of insurance providing coverage for specified circumstances and insuring by description all or nearly all persons within a class of persons defined in a policy issued to a master policyholder, and not by specifically naming the persons covered (e.g. volunteer fire department or school students.)

Deferred compensation

is a nonqualified retirement plan that involves a promise by the employer to pay additional compensation, or deferred compensation, to an employee in the future (e.g., at retirement, death or disability). The employee is not guaranteed receipt of the funds, nor would he be entitled to the compensation if he left the company for a reason other than retirement, death or disability. As a result, the plan serves as a means of keeping valued employees with the company. A deferred compensation plan can be used to: provide an employee with greater retirement benefits; or defer payment of an employee's current salary to a time when he would be in a lower tax bracket. Such a plan could be funded or unfunded. Among other methods, an employer could fund it by purchasing an annuity or life insurance. The employer would be the policyowner, beneficiary and premium payor, and the employee would be named as the insured.

Split-dollar life insurance

is an arrangement under which two parties "split" the death benefit, living benefits, and premium for life insurance. It is often used so an employee can get life insurance at a lower cost than if he purchased the same policy on his own. In these plans, the premiums start out high for the employee and get lower as the policy builds up cash value. The amount payable to the employee's beneficiary will also decrease over time. The employer's contribution to the premium equals the increase in the policy cash value with the employee paying the balance. For Example Lisa and her boss join in the purchase of a $50,000 cash value policy on Lisa's life. Her boss contributes to the annual premium an amount equal to the annual increase in the policy cash value, and Lisa pays the balance of the premium. The first year the boss paid $100, and Lisa paid $1,100. The second year, the boss paid $120, and Lisa paid $1,080. If Lisa were to surrender the policy after two years, the $220 cash value would be paid to her boss. If Lisa were to die after the two years, her boss would be paid the $220 equal to the cash value or an amount at least equal to the total of his share of the premium payments, and Lisa's beneficiary would be paid the balance of the $50,000 proceeds.

key employee, or key person, life insurance policy

is used to insure a person whose contributions to the business are considered essential. Such a policy could insure an owner or an officer of the company, a sales manager, a plant superintendent, a department head or any highly skilled employee. An owner who is an essential contributor to the business would likely have both a buy-sell and key person life insurance policy protecting him. The employer is the policyowner, and it: has complete control of the policy and its cash values. pays the premiums. Note The premiums are not tax deductible as a business expense. If the key employee terminates employment or lives to retirement, the employer may: continue the policy; surrender the policy for the cash value; sell and assign the policy to the employee; or use the cash values to fund a deferred compensation plan for a retired employee. The employer is also the beneficiary of the policy. As such: if the key employee dies, the employer gets the proceeds of the policy without any restrictions on how to apply them. since the premiums were not deductible as a business expense, the proceeds are not taxable as income to the employer. Some key employee contracts include a change-of-insured provision that allows the employer to change the person whose life is insured when there is a change of personnel without the need to cancel the existing policy and issue a new one.

Entity Plan

it is the partnership entity that agrees to purchase the interest of the deceased. The partnership itself owns, pays for and is the beneficiary of policies insuring the partners' lives. If there were five partners, the partnership would purchase five policies instead of the 20 policies required with a cross-purchase plan. When one partner dies, the proceeds of the policy are paid to the partnership and used to buy the deceased partner's interest, which is then distributed among the surviving partners. For Example Because Dell, Lea and Meadow do not want to buy six policies, they decide to enter into an entity plan. Goin' to Seed will buy three life insurance policies of $100,000 covering each of the partners. If one of the partners dies, the company will have $100,000 to buy out the deceased partner's interest from his heirs.