Chapter 5 Flashcards
Noncontributory
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 employee. One major benefit of a noncontributory insurance plan is that it helps the insurer avoid adverse selection.
Contributory
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 eligible employees must be insured in most states.
Certificate of insurance
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.
Master policy
issued to the employer under a group plan; contains all the insuring clauses defining employee benefits. individual employees participating int he group plan receive individuals certificates that outline highlights of the coverage.
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 the 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.
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 life insurance.
used when participants are employees of a common employer (i.e. the employer may operate several companies) or are members of a common association or society. The employer/association/society is a sponsor of the plan and may or may not contribute to the premium payments. Unlike the employers group plan, each individual will be issued an individual policy which will remain in force as long as premiums are paid and the employee/member maintains their relationship with the sponsor. These are used by small groups who individually do not meet the state’s minimum number required by law.
Credit policies
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.
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 change. A blanket health 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.
What separates 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 insurance, which provides a fixed amount of coverage throughout the term of the contract
low cost due to lower administrative, operational, and selling expenses associated with group plans
flow of insureds: entering and exiting under the policy as they join and leave the group
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, who becomes the policy holder.
Employees are called certificate holders.
Employers are called contract holders.
Setting up group life insurance
a number of people may not form a group just to secure group life insurance coverage. The securing of such coverage must be incidental to the group’s formation. In other words, a group of people cannot form an organization whose main purpose is to secure life insurance coverage. There ‘generally’ must be an employment relationship present in order for group coverage to be secured. They must be formed for a reason other than obtaining 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)
Eligibility of group life insurance members
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
After all necessary information is collected on an applicant, the underwriter will classify the applicant based on the degree of risk assumed.
Adverse selection
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.
Risk classification system
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 high
SGLI & FEGLI
The federal government provides life insurance coverage for those in the armed services and other federal employees.
Serviceman’s Group Life Insurance (SGLI) is provided up to $400,000 (in $50,000 increments) for full time members of the armed services. The coverage provided is group term life insurance and all active members are covered unless they choose otherwise.
Federal Employees Group Life Insurance (FEGLI) provides group term life insurance for all other federal employees or civil service workers.
Determining eligibility
must benefit at least 70% of all employees. At least 85% of all participating employees must not be key employees.
