Unit 6

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 Insurers require that a minimum number of group members/employees participate in a group insurance plan in order to minimize adverse selection. Adverse selection means that the people most likely to need life insurance will purchase life insurance in greater numbers than those in good health. After all necessary information is collected on an applicant, the underwriter will classify the applicant based on the degree of risk assumed.

Flat benefit:

A flat benefit schedule provides the same amount of life insurance to all employees, regardless of their earnings or position. Flat benefit schedules are most frequently used when the employer wants to provide only a small amount of insurance to its employees.

A multiple employer welfare arrangement (MEWA)

A type of MET for union employees that is self-funded and has a tax-exempt status. Employees covered under an MEWA are required by law to have an employment-related common bond.

Group Credit Life Insurance

A type of decreasing term insurance, it is issued by insurance companies to creditors to cover the lives of debtors in the amounts of their respective loans. Typically, it is provided through commercial banks, savings and loan associations, finance companies, credit unions, and retailers. If an insured dies before the insured's loan is repaid, the policy proceeds are paid to the creditor to settle the remaining loan balance. Unlike regular group life insurance, premiums for group credit life may be paid wholly by the individual insureds. State laws, which vary, generally set a maximum amount of group credit life insurance per individual creditor (generally the creditor must have a minimum of 100 debtors per year) and limit the amount of insurance per borrower, which may not exceed the amount of indebtedness. Debtors cannot be forced to take the coverage from any particular insurance company.

Employment position:

An employment position schedule sets the amount of life insurance according to an employee's position with the company. For example, general staff employees may be provided with $30,000 of life insurance, managers with $50,000, account supervisors with $75,000, and vice presidents with $100,000.

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.

Low Cost

Another characteristic of group insurance is that, per unit of benefits, it is available at lower rates than individual insurance. The primary reason for its reduced cost is lower administrative, operational, and selling expenses associated with servicing one contract (the group contract) as opposed to several individual contracts. Additionally, most employers pay all or part of the group premium, so members can have insurance coverage for far less than what they would normally pay for an individual or personal plan.

Master Contract

Because of this, individual underwriting and individual evidence of insurability are generally not required. When it comes to underwriting, the insurer looks at the group as a whole, not at the health, habits, or characteristics of individual members. Group insurance involves experience rating, which is a method of establishing a premium for the group based on the group's previous claims experience. Larger and more homogeneous groups will provide more accurate mortality and morbidity rates Group insurance is a way to provide life insurance, health insurance, or both kinds of coverage for a number of people under one contract. Typically, group insurance is provided by an employer for its employees; however, it is available to other kinds of groups as well, as we will see. Different from individual life insurance, which is written on a single life, group life insurance is written on more than one life. Group life insurance is usually written for employee-employer groups and is most often written as an annually renewable term policy.

Blanket Life Insurance (common hazard)

Blanket life insurance covers a group of people exposed to a common hazard. Individuals do not need to apply for blanket coverage and insurers do not need to provide each person with a certificate of coverage. Insureds are not specifically named in the policy because coverage is temporary. In fact, individuals may be covered for only a few hours at a time. Members of the group are automatically covered, but only while participating in the specific hazards named in the policy. For example, a blanket policy can be issued to the owner of an airline to cover its passengers. A person is covered by the blanket policy only while a passenger on that airline. State insurance laws generally allow a number of groups to hold blanket life insurance policies. Some common policyholders include the following: • A college, a school, or a principal of a school, covering students, teachers, or employees • Religious, recreational, or civic organization, covering its members while participating in specific hazards as part of an activity sponsored by the organization • Employer, covering any group of employees who participate in specified hazards of employment • Sports team, covering members while they are participating on the team • Volunteer fire department, covering its firefighters while participating in specifc hazards related to membership (such as fighting fires) • Newspaper, covering its carriers

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.

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. The IRS requires the cost of employer-provided group life insurance above $50,000 to be taxable as income to the employee. 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. Most employers will establish benefit schedules according to the following: ► Earnings ► Employment position ► Flat benefit

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.

Contributory

Is a group insurance plan issued to an employer under which both the employer and employees contribute to the cost of the plan. Generally, 75% of the eligible employees must be insured in most states. a group plan requires its members to pay a portion of the premium An employee group insurance plan in which employees share the cost. Insurance company requires that at least 75% of all eligible employees participate.

Noncontributory

Is an employee benefit plan under which the employer bears the full cost of the employees' benefits; in most states, the plan must insure 100% of eligible employees. When an employer pays the entire premium, the plan is called a noncontributory plan, because employees are not required to contribute to premium payments The employer pays the entire cost of the plan. Insurance company requires that 100% of all eligible employees participate. One major benefit of a noncontributory insurance plan is that it helps the insurer avoid adverse selection.

Group Term Life

Most group life plans are term plans, which use annual renewable term (ART) insurance for the underlying policy. This gives the insurer the right to increase the premium each year (based on the group's experience rating), and it gives the policyholder the right to renew coverage each year. As is characteristic of ART policies, coverage can be renewed without evidence of insurability. The prevalent use of ART insurance is another reason why the cost of group insurance is fairly low.

Determining eligibility:

Must benefit at least 70% of all employees. At least 85% of all participating employees must not be key employees.

Conversion to Individual Plan

Once coverage becomes effective for an individual under a group life plan, it remains in effect until the individual leaves the employer group, or the plan is terminated. In some states, group life policies must contain a conversion provision that allows individual insured members to convert to an individual plan without evidence of insurability if their employment is terminated. Usually, the employee has a limited period of time following termination (typically 31 days) in which to exercise the conversion privilege. This means that the group coverage will continue in force for the terminated employee for the duration of the conversion period, even if no conversion takes place. For example, a former employee covered by the employer's group life insurance who dies within 31 days after termination of employment, will prompt payment of the death benefit to the former employee's beneficiary. Most group conversion provisions require the individual to convert to a whole life policy as opposed to term. The premium for the new policy is based on the individual's attained age at the time of conversion. There is a growing trend among employers to offer more than just a conversion privilege. Many employers are now offering portable group term life insurance. This means that employees can take their insurance with them when they leave the employer. The insurance coverage remains a term life benefit with no cash value.

Group Permanent Life

Some group life plans are permanent plans, using some form of permanent or whole life insurance for the underlying policy. The most common types of permanent group plans are group ordinary, group paid-up, and group universal life. Group ordinary insurance is any type of group life plan that uses cash value life insurance. In some cases, employees are allowed to own the cash value portion of the policy if they contribute to the plan. In other cases, an employee's termination results in the forfeiture of the cash value, which is then used to help fund the plan for the remaining employees. With group paid-up plans, a combination of term and whole life insurance is used. Usually the employer pays for the term portion of the plan and employee contributions are used to purchase units of single-premium whole life. The sum of the employees' paid-up insurance and the employer-paid term insurance (usually decreasing term to offset the annually increasing amount of paid-up insurance) equals the amount of life insurance employees are entitled to under the plan. Upon retirement or termination, employees acquire 100% ownership of their paid-up policies. A growing number of group life plans use universal life insurance policies due to their flexibility. The underlying policy contains the same features as individual universal life, but the policy is administered as any group ordinary policy. Characteristic of group universal life plans is employees pay most of the premium. However, they are given certain rights to policy ownership that are not found in ordinary group life plans. Proceeds paid under a group life plan to a deceased employee's beneficiary are exempt from income taxation if they are paid in a lump sum. If the proceeds are paid in installments, which consist of principal and interest, the interest portion is taxed. For a group life insurance plan to receive favorable tax treatment, the government imposes some requirements to ensure that rank-and-file employees are not discriminated against in favor of select key employees. Basically, these requirements apply to eligibility and the type and amount of benefits provided.

How Benefits Are Determined

The type and amount of benefits provided to each insured member under a group life plan are typically predetermined by the employer (policyholder). Most employers will establish benefit schedules according to earnings, employment position, or as a flat benefit. A set schedule, such as one of these, helps protect the insurer against adverse selection, because the employees do not have the option to insure themselves for any more or any less than the schedule allows. Earnings: Under an earnings schedule, the amount of life insurance provided to individual employees is based on each employee's salary or earnings. It can be a flat amount per earnings level or a percentage of earnings. For example, an earnings schedule can provide an employee with life insurance coverage equal to 1.5 times that particular employee's salary.

Types of Group Life Plans

There are many types of group life plans insurers offer to employers. The appropriate choice depends on the employer's objectives, needs, and resources. Additionally, group life may be term or permanent coverage.

group life insurance,

a claim is triggered by the death of a covered member. The member's benefciary will receive a stated amount in death proceeds. For group health insurance, a covered member affected by accident, illness, or disability triggers a claim. The plan will provide a stated beneft to help cover the corresponding medical costs or replace income lost due to the disability. Thus, the purpose of group life and health plans is identical to individual life and health plans. However, there are a number of features of group plans that distinguish them from individual plans. Master Contract

Franchise Life Insurance (a.k.a. wholesale insurance)

a form of group insurance that covers employees of a common employer or members of a common association or society. However, franchise insurance deviates from typical group insurance arrangements because it does not require a master policyholder. Instead, it simply serves as the "sponsor" of the plan and collects premiums from its employees or members and remits them to the insurance company. A franchise plan may provide for employer contributions. Each individual insured under a franchise arrangement is given an individual policy. As long as the individual continues to pay the premiums, the insurance policy will remain in force even if the association with the employer or society is terminated. Under a franchise plan, the type and amount of insurance available to individual members is determined by the sponsoring association. Franchise life plans are commonly used for small groups whose numbers are less than the minimum required by state law for group insurance coverage.

Franchise Insurance

a life or health insurance plan for covering groups of persons with individual policies uniform in provisions, although perhaps different in benefits. Solicitation usually takes place in an employer's business with the employer's consent. Generally written for groups too small to qualify for regular group coverage. May be called wholesale insurance when the policy is lifeinsurance.

portable group term life insurance

all of the ported policies are pooled together rather than remaining in the employer's plan. The rates, therefore, are more akin to group rates and are much lower than individually-sold coverage. In contrast, most group conversion provisions require the individual to convert to a whole life policy, as opposed to term. As a result, the policy's rates will mirror individual rates and will generally be much higher.

Conversion Privilege

allows a policy owner, before an original insurance policy expires, to elect to have a new policy issued that will continue the insurance coverage. Conversion may be effected at attained age (premiums based on the age attained at time of conversion) or at original age (premiums based on age at time of original issue). Conversion is a common privilege for term life insurance and all group insurance. The insured does not have to prove insurability (good health) when converting a policy.

Credit Policies

are designed to help the insured pay off a loan in the event they are disabled due to an accident or sickness or in the event they die. If the insured becomes disabled, the policy provides for monthly benefit payments equal to the monthly loan payments due. If the insured dies, the policy will pay a lump sum to the creditor to pay off the loan. Credit policies typically cannot exceed the amount of the loan as that is the only amount the creditor has insurable interest in.

flow of insureds,

entering and exiting under the policy as they join and leave the group. In fact, to operate effectively group insurance requires a constant influx of new members into the group to replace those who leave and to keep the age and health of the group stable. Which kinds of groups are eligible for group insurance coverage? Generally, almost any kind of natural group, those formed for a purpose other than to obtain insurance, will be considered by an insurer. Insurable groups most typically fall into one of the following categories: • Single-employer groups • Multiple-employer groups • Labor unions • Trade associations • Creditor/debtor groups • Fraternal organizations In years past, only groups of a certain size, such as 50 or more people, were eligible for group insurance. Today, in accordance with NAIC guidelines that do not set a minimum size limit, insurers often issue coverage to groups with as few as 10 (or fewer) members. It is important to note, however, that once a group policy is issued, insurers usually require that a certain number or percentage of eligible members participate in order to keep the coverage in force. Remember that most states impose their own regulations on group insurance and often stipulate a minimum number of participants, usually 10, that constitute an eligible group.

Certificate of insurance

is a document issued by an insurance company/broker that is used to verify the existence of insurance coverage under specific conditions granted to listed individuals. With group insurance, the group (typically employer) is the policy owner and maintains a master policy. The insureds (typically employees) receive a certificate of insurance in lieu of a policy.

A Master policy

is issued to the employer under a group plan; contains all the insuring clauses defining employee benefits. Individual employees participating in the group plan receive individual certificates that outline highlights of the coverage.

Blanket Health Policies

issued to cover a group who may be exposed to the same risks, but the composition of the group (the individuals within the group) are constantly changing. A X plan may be issued to an airline or a bus company to cover its passengers or to a school to cover its students. No certificates of coverage are issued in a blanket health plan, as compared to group insurance.

METs (Multiple Employer Trusts )

may provide a single type of insurance (such as health insurance) or a wide range of coverages (life, medical expense, and disability income insurance). In some cases, alternative forms of the same coverage are available (such as comprehensive health insurance or basic health insurance). An employer who wants to get coverage for employees from a MET, must first become a member of the trust by subscribing to it. The employer is issued a joinder agreement, which spells out the relationship between the trust and the employer and specifies the coverages to which the employer has subscribed. It is not necessary for an employer to subscribe to all the coverages offered by an MET. A MET may provide benefits on a self-funded basis, or through a contract purchased from an insurance company. In the latter case, the trust, not the subscribing employers, is the master insurance contract holder. In either case, the employees of subscribing employers are provided with a benefit description (certificates of insurance) in a manner similar to the usual group insurance agreement. In addition to alternative methods of funding benefits, METs can be categorized according to way in which they are administered. That is, by an insurance company or a third-party administrator.

Adverse selection

means that the people most likely to need life insurance will purchase life insurance in greater numbers than those in good health. After all necessary information is collected on an applicant, the underwriter will classify the applicant based on the degree of risk assumed.

Eligibility of Group Members

• The plan must benefit at least 70% of all employees; or • At least 85% of all participating employees must not be key employees Regarding benefits, the plan cannot discriminate in favor of key employees. For example, the amount of life insurance provided to all employees must bear a uniform relationship to their level of compensation or position. If a group life insurance plan fails to meet these nondiscriminatory requirements, the cost of the first $50,000 of coverage-normally excluded from gross income-will be included in a key employee's gross income for tax purposes. Rank-and-file employees are not so penalized. By its very nature, group insurance provides for participation by virtually all members of a given insured group. Regardless of whether an individual member chooses to participate depends on the amount of premium that individual must pay, and if the plan is contributory. If the plan is noncontributory and the employer pays the entire premium, full participation is the general rule. However, employers and insurers are allowed some latitude in setting minimum eligibility requirements for employee participants. For example, employees must be full-time workers and actively at work to be eligible to participate in a group plan. If the plan is contributory, the employee must authorize payroll deductions for the employee's share of premium payments. In addition, a probationary period may be required for new employees. This 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 designed to minimize the administrative expense involved with those who remain with the employer only a short time. 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), the employee may be required to provide evidence of insurability if enrollment is desired at a later date. This is to protect the insurer against adverse selection.

favorability of a given risk Classifications:

► 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 HighLower risks tend to have lower premiums. If an applicant is too risky, the insurer will decline coverage. 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.

the two features that separate group insurance from individual insurance:

► the individual does not have to provide evidence of insurability ► are not issued as individual policies so the individual does not own the contract ► typically issued as level term term insurance, which provides a fixed amount of coverage throughout theterm of the contract Note: Since the individual does not own or control the policy, they are issued a certificate of insurance (sometimes called certificate of coverage and benefits) to serve as evidence of an employee's coverage. The actual policy, which is called the master policy, is issued to the employer. ► Employees are called - certificate holders ► Employers are called- contract holders

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 obtain 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)