Group Life Insurance
Coverage During Labor Dispute
Group insurance coverage cannot be suspended or terminated if plan participants are involved in a labor dispute with the plan sponsor.
Eligible Groups
To qualify for group insurance, a group must be a natural group formed for some reason other than purchasing group insurance. A group of neighbors, friends, or family members would not be allowed to organize themselves simply for the purpose of qualifying for group insurance.
Multiple Employer Trusts (METs)
Some states allow two or more employers to form a trust to buy group insurance for their employees. Employers in a MET must be in the same industry. Contributions from the employers, employees, or a combination of both are paid into the trust. The trust buys insurance for the benefit of the employees and is the owner of the policy. The group must have a minimum of two employers and 100 employees. For contributory plans, 75 percent of the group must be enrolled. For noncontributory plans, 100 percent of the group must be enrolled. --MET= A trust of two or more employers that buy group insurance for their employees. Contributions from the employers, employees, or a combination of both are paid into the trust. The trust buys insurance for the benefit of the employees. The trust owns the policy.
Assignability
Although the group life policyowner is the employer or association, insured employees have certain rights. One of these is the right to name a beneficiary. Another is the right to assign the death benefit. A formal assignment must be made in writing to the insurance company and registered before the assignment is official. Some group policies allow for an absolute assignment and/or an irrevocable beneficiary. If this is the case, then the insurance coverage can be used for a viatical settlement. Viatical settlements are for the benefit of the chronically or terminally ill insured. Their purpose is to gain a sum of money that might be needed to pay medical expenses or to enhance quality of life. -absolute assignment (Complete transfer of all rights in an insurance policy to a third party; giving up the control of all rights in an insurance policy) - irrevocable beneficiary(Beneficiary designation in a life insurance policy that the policyowner cannot change without the beneficiary's written consent) -Viatical settlements (Sale of the rights and benefits in an existing life insurance policy to an investor; when a terminally ill person transfers ownership of a life insurance policy to another in return for payment of some amount less than the policy's death benefit)
Employers
From small businesses to Fortune 500 companies, employers make up the largest segment of group insurance plan sponsors. Employers may either sponsor a group plan themselves or serve as a trustee of a group plan established for the benefit of the employees. Most states impose a minimum size requirement for group insurance plans, with 10 people being the most common minimum. Some states allow smaller employers to sponsor group insurance plans. All employees meeting eligibility requirements must be allowed to participate. Individual discrimination by the employer is prohibited.
Characteristics of Group Life
Group life insurance covers groups of people, unrelated except for their common association with the group, under a single contract. To qualify for any type of group insurance, the group must be a "natural group" created for some other reason than to obtain group insurance. The most common use of group life insurance is in the business arena. Employers buy group life coverage for the benefit of their employees. Group life insurance is most often provided in the form of annually renewable term insurance (though a form of group permanent life insurance is available). The National Association of Insurance Commissioners (NAIC) model group life insurance bill set the standard for group term life insurance policies. Now followed in the majority of states, these requirements include the following: -A group must cover at least ten persons under one master policy. -Individual medical examinations are generally not required. -The master policy is issued to the employer, trust( a legal entity established to own and hold property or assets for the benefit of another person or people), or labor union; the participant receives a certificate of insurance. -The insurance must be bought for the benefit of the participants. Many states prohibit the employer from being named as beneficiary. -Premiums are based on the experience of the entire group, not individuals. -Individuals are classified such that they do not choose the benefit levels of the plan. Therefore, the plan is nondiscriminatory. --National Association of Insurance Commissioners (NAIC)=An association of insurance commissioners in the various states. Actively proposes model law that standardize policies and promote fair trade practices in the insurance industry. For group life, premium rates are averaged for the entire group. Because people consistently move in and out of the group (new hires coming into the group and retirees leaving it), the premium rates for life insurance are fairly constant. Due primarily to the lower administrative and operational costs, group life insurance is less expensive than individual life insurance for any given death benefit amount. Some states limit the amount of group term life insurance that can be offered. In Texas, for example, the maximum amount of group term life insurance is $250,000, or 700 percent of salary, whichever is greater. Most plans provide coverage amounts linked to the individual's salary in one way or another.
Group Underwriting Requirements
Group underwriting focuses on the group as a whole, not on the individual participants. The success of group underwriting relies on a mix of healthy insureds and those who might otherwise be uninsurable. This explains why group plans have minimum participation requirements. The larger the group, the easier it is to predict future losses. However, with small groups, losses are more unpredictable. Group underwriters set requirements to offset the risk of loss based on the group. For example, the underwriter can -require a minimum group size; -make sure that the group is eligible and is a group the insurer does cover; -determine that the required percentage of group members has enrolled for the insurance; -confirm that all applications received are complete and accurate; and -assign rates based on a perceived higher risk posed by the group as a whole or by a sub-class within the group. The underwriter cannot discriminate against an individual member. In turn, the group cannot exclude one member from coverage based on that person's risk potential. Neither can the group reward one group member with greater benefits.
Multiple Employer Welfare Arrangements (MEWAs)
Similar to an MET, an MEWA is an arrangement whereby a group of employers join forces (and contributions) to sponsor a group insurance plan. MEWAs are a popular way for small businesses to provide group benefits to their employees. As with multiple employer trusts, some states allow the formation of MEWAs to buy group insurance for their employees. Participating employers must be in the same trade or industry. MEWAs come in two forms: those that are fully insured and those that are self-insured: 1. In a fully insured MEWA, two or more employers, usually from the same business, form an arrangement to buy insurance for the benefit of their employees. The same rules and enrollment requirements apply as for the MET. 2. To be self-insured, the MEWA must get a certificate of authority from the state in which it is formed and must submit reports similar to those required of an insurance company. Self-insured MEWAs must have at least five employers and 200 employees.
Minimum Participation Requirement
To prevent adverse selection, a majority of employees must be covered under the plan. This is most readily achieved through a minimum participation requirement that varies only by whether the plan is contributory or noncontributory: If the plan is contributory (meaning employees pay a share of the premium), at least 75 percent of eligible employees must elect to participate. If the plan is noncontributory (meaning the employer pays the entire premium), 100 percent of eligible employees must be covered under the plan.
Conversion Privilege
Group term life insurance coverage normally ends for a participant when that person leaves the group. For someone who is uninsurable this poses a problem, since it would be impossible to purchase an individual policy. Fortunately, group life plans include a conversion privilege that gives participants the right to convert their group life coverage to an individual life insurance policy of equal face amount without providing evidence of insurability. The maximum conversion amount is generally equal to the amount of coverage the person had under the group plan. Conversions typically must be requested within 31 days following termination or retirement from the group. During this 31-day period, group life coverage continues in effect for the terminated employee. If the terminated participant dies within the 31-day conversion period, the group life death benefit is payable. The typical conversion provision only gives the right to buy a life policy other than term insurance. However, a small number of insurers also make term insurance available to terminating employees. When the group plan itself is being terminated, the participants are generally given a far more restrictive conversion right. In such cases, the conversion amount is limited to the lesser of $2,000 or the amount of the participants' coverage at the date of termination
Contributory vs. Noncontributory Group Plans
Group insurance plans may be funded entirely by the plan sponsor (in group life ins. the sponsor is the policyowner and premium payor) or premiums may be split between the sponsor and the plan participants. If the premium is paid entirely by the employer, the plan is known as a noncontributory plan. If some portion of the premium is paid by the employee, the plan is known as a contributory plan. As a general rule, noncontributory plans must cover all eligible group members. However, because no group member can be required to participate in a plan that requires member contributions, the minimum participation requirement is less (typically 75 percent) for contributory plans. Contributory plans are common with group health insurance plans. Group life insurance plans, however, are typically noncontributory.
Types of Plan Sponsors
The following groups are the most common types of eligible group insurance sponsors: -employer/employee groups -association groups -labor union groups (can buy group policies to insure members of the union. The union owns the policy for the benefit of the members.) -multiple employer trusts (METs) -multiple employer welfare arrangements (MEWAs)
oN TEST
-Group life ins. can get coverage for people who don't have insurance bc they are part of that group. Good for unsurable people. -Group Underwriting does not look at individual risks. -To qualify the group must be a natural group. -Minimum size requirements -Minimum participation requirments -No individual benefit selection
Credit Life Insurance
Credit life insurance is designed specifically to cover the life of a borrower in the amount of his or her outstanding loan. If the borrower dies, then the policy pays the policy's death benefit to the creditor. The type of insurance plan used for this purpose is usually decreasing term insurance. The coverage is matched to the declining balance on the loan. And, as the insured's loan balance decreases, so does the coverage. Credit life insurance is offered as group or individual insurance. Typically, the creditor offers group credit life insurance. In this scenario, the creditor is the policyowner and the borrower is the insured. State law (which varies among the states) sets the rules for maximum coverage limits that the creditor can offer borrowers. State law also prevents creditors from forcing borrowers to buy credit life insurance.
Group Life Standard Policy Provisions
Like individual life insurance policies, group life policies are characterized in part by certain standard provisions, including -a grace period (typically 31 days) for paying the premium after the due date before lapses; -incontestability after two years except for nonpayment of premiums and fraudulent misstatements on the application; -entire contract provision stating that only the application and policy document constitute the policy; -a provision setting forth conditions, if any, under which the insurer can require an individual participant to provide evidence of insurability; -a provision giving participants the right to designate their beneficiary; and -a provision stipulating the right of terminated participants to convert their group life coverage to an individual policy of equal face amount without providing evidence of insurability. --Entire contract provision= life and health provision that states that if any guarantees, promises, exclusions, or anything else not included in the policy (or in the application, if made a part of the policy), then they are not part of the contract
Quiz
Question 1 Jake and five of his friends are self-employed in different fields. They want to form a group so that they can buy group life insurance. What can they do? *Jake and his friends would probably not be considered an eligible group for insurance purposes. Jake and his friends would need to find at least two more people to join their group to be eligible for group life insurance. Jake and his friends could form a Multiple Employer Welfare Arrangement to get group life coverage. Jake and his friends could form an association group to get group life coverage. To qualify for group life insurance coverage, a group must exist for some reason other than to get insurance. Question 2 If the employer pays the entire premium for group term life insurance, what is the plan called? fully insured self-insured contributory *non-contributory If an employer pays the entire amount of premiums for a group term life insurance policy, the plan is a non-contributory plan. Under a contributory policy, both the employer and employees share premium payments. Question 3 Which statement about credit life insurance is NOT correct? -It is only offered on a group basis. As the borrower's loan balance decreases, the amount of coverage also decreases. The creditor is the policyowner and the borrower is the insured. It is usually sold in the form of decreasing term insurance. Credit life insurance covers the life of a borrower in the amount of his or her outstanding loan. The coverage is matched to the declining balance on the loan. As the insured's loan balance decreases, so does the coverage. Question 4 When underwriting group life insurance, the underwriter can offset the risk of loss posed by the group by doing all of the following, EXCEPT requiring a minimum group size. making sure the required percentage of group members has enrolled for insurance. making sure that all applications are complete and accurate. -denying insurance coverage to any person with a pre-existing condition. Although underwriters cannot deny coverage to someone who has a pre-existing condition, they can exclude coverage for a pre-existing condition for a specified period only. This helps offset the risk of loss posed by the entire group. Question 1 What do covered employees receive to show they have coverage under a group life insurance policy? copy of the master plan certificate of enrollment -certificate of insurance individual insurance contract The insureds get a certificate of insurance to show that they have coverage under the policy. Question 2 Which of the following employees of ABC Computers could NOT convert their group life coverage to an individual policy? Emily, who was laid off from her job this month Sue, who voluntarily terminated employment this month to work for a competitor -Bill, who is on long-term disability this month Paul, who retired this month Even though Sue quit to work for a competitor, she can convert her coverage under the group policy to an individual policy. Question 3 Which of the following statements is correct if a labor union buys a group life insurance policy to insure its members? The union must pay all of the premiums. All of the union members must enroll. -The union owns the policy for the benefit of the members. The union members are the policyowners. If a labor union buys a group policy to insure its members, the union is the policyowner. Question 4 All of the following can sponsor group life insurance plans EXCEPT: municipalities labor unions individual employers -neighborhoods Insurable groups include single-employer groups, labor unions, and members of associations such as cities and towns. A neighborhood which forms a group to buy insurance would generally not be considered an eligible group.
Labor Unions
Labor unions can sponsor group insurance plans for the benefit of their members. Union-sponsored plans are subject to the following restrictions: -Either all members of the union or all members of individual classes of the union must be eligible. Class is determined by the individual's membership, by the conditions of employment, or both. -Premiums must be paid entirely from union funds or from a combination of union funds and member funds. If premium payment is contributory (some part of the premiums is paid by the employee), then 75 percent of the members must be enrolled. If premium payment is noncontributory (premiums are paid entirely by the union), then 100 percent of the members must be enrolled. A minimum of 10 members must be enrolled when the policy is issued.
Association Groups
People who are members of associations, such as independent school districts or cities and towns, can be insured under an association plan. As with employer groups, a minimum of 10 people is typically required for an association to qualify as a group insurance plan sponsor. The association is the policyowner for the benefit of its members and is subject to the following requirements: -All members must be eligible. -Two or more employers in the same business can form a group to buy insurance for their employees. -Premiums can be paid by contributions entirely from the employers, entirely from the employees, or a combination of the two. -If a plan is contributory, members are not required to participate but, as with employer groups, at least 75 percent must elect to participate
Group Life Insurance
For many people, life insurance is not provided through individually owned policies but through their employer, labor union, or some other group. Premiums can be -Contributory= The plan must cover at least 75% of eligible members. Employer and employee contribute to premium payment -Noncontributory= The plan must cover 100% of eligible members. Employer pays all of the premium payment.
Key Points
-To qualify for any type of group insurance, the group must be a "natural group" created for some other reason than to obtain group insurance. -With a group life policy, the sponsor of the group is the policyowner and premium payor. The individual members of the group are the insureds. -If the premium is paid entirely by the employer, the plan is known as a noncontributory plan. If some portion of the premium is paid by the employee, the plan is known as a contributory plan.
Master Policy and Certificates of Insurance
With a group life policy, the sponsor of the group is the policyowner and premium payor. The individual members of the group are the insureds. The group sponsor receives a master policy, which indicates the sponsor as policyowner and premium payor. To indicate their coverage under the policy, the insureds are given a certificate of insurance. Each individual insured names his or her beneficiary or beneficiaries
