Chapter 6: Markets and Social Security Flashcards
Group Insurance Market
Group life insures a group of people under a single contract. State and federal laws restrict the insurer’s underwriting criteria for group policies. The purpose of group life is to underwrite a combined risk of a group of individuals as a single policy. It allows the insurer to write a bulk amount of insurance at an appropriate rate. The group sponsor benefits both from the standpoint of employee retention, but also because costs are lowered because the sponsor takes on some of the tasks of marketing and administration.
Group Risk Selection
Risk selection may have several aspects, such as size, stability, and industry. For example, group life insurance products may require a minimum number of participants in order to avoid claims that are inadvertently skewed higher because of a few individual substandard risks.
Underwriters are also concerned about stability. It is important to know how long the group has existed, how often the group switches providers, and the group’s unifying characteristic. Individual turnover is less important.
Unlike an individual plan, the departure of an individual does not mean the policy is cancelled. Instead, the sponsor and the insurer may drop one employee and pick up another. Also, the sponsor is doing some of the administration.
Characteristics of Group Insurance Plans
- Contract is between Sponsor and Insurance Company
- Plan sponsor receives Master Policy
- Each participant receives Certificate of Insurance. Participants do not have personal control of the policy or policy changes as with an individual policy.
- Sponsor may set terms and determine which classes of employees qualify, such as full-time vs. part-time employees. Plan cannot discriminate, so all members of the eligible class must be be eligible for predetermined benefits based on a single formula, such as the same percentage of annual income.
- Sponsor can elect to discontinue and insurance company can increase rates
- Must be a natural group
- Must have a grace period (typically, 31 days)
- Usually written as ANNUAL RENEWABLE TERM
- Evidence of insurability not required if individual enrolls when eligible.
Types of Group Plan Sponsors
Group plans may be sponsored by employers, associations, creditors, labor unions, or trusts. The most common type of plan sponsor is an employer group and they have the following characteristics:
- May be a partnership, a corporation, or a sole proprietorship
- There are two legal employer-employee groups fitting one of the following definitions:
- Contributory
- Noncontributory
- An employee must be a full-time employee in the immediate group, a subsidiary firm, or any active partner to be eligible for coverage.
Contibutory
Employees must contribute to the premium payments and at least 75% of eligible employees must participate.
Noncontributory
Employer pays the entire premium with a mandatory 100% of the eligible employees participating. The percentage participation requirements are used to reduce adverse selection.
Group Underwriting
- Underwriter’s greatest concern is adverse selection
- Group plans can have probationary period set by group sponsor to protect against preexisting conditions and immediate claims. Period is between when individual is hired and when they become eligible to enroll in the group plan. As long as individual enrolls during open enrollment, coverage is guaranteed without evidence of insurability. Individuals who do not enroll during open enrollment are considered late enrollees and must provide evidence of insurability unless they wait until next open enrollment period.
- Open enrollment offered on annual basis
- Individuals can make changes at any time they have a change in status (adding an eligible dependent or change in employment status, such as full-time to part-time)
- Cost of plan is determined by the average age of group, size, industrial classification (nature of work involved), experience rating (group’s claims), and the turnover history of personnel. These factors are more important than the actual overall health of the group.
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 their group life insurance benefit to an individual permanent policy.
- Premium will be offered at a higher than normal rate to include insurer’s guaranteed convertible surcharge, since the majority of conversions are on persons that would otherwise be uninsurable. Premiums will also be higher because the conversion policy will be issued at the attained, or current age of the insured and the policy builds cash value.
- Conversion period is also a grace period. In the event a terminated or ineligible employee dies during the conversion period, whether they were going to elect individual coverage or not, a death claim will be paid by the group policy, less the premium due for the benefit.
Franchise (Wholesale)
This type of group insurance is unique - a Mater Policy is not issued since underwriting is on an individual basis, and individual policies are issued, meaning evidence of insurability may be required. The employer may be the premium payor or the premium costs may be shared by the employer and employee. The grace period is typically 31 days, and the employer is responsible for the plan administration, making it less expensive than individual policies. The insurer requires a minimum number of participants before underwriting and the group must be together for reasons other than to purchase insurance.
Specialized Plans
- Credit Life Insurance (Individual and Group)
- Industrial (Home Service)
Credit Life Insurance (Individual and Group)
Either a form of individual coverage on the life of a debtor, or group insurance issued to a creditor providing coverage on debtors for the benefit of creditors. Both types of plans are normally a form of Decreasing Term, and the amount of insurance reduces as the amount of obligation reduces.
Usually the individual debtor pays the premium. A few dollars of a monthly payment are credited toward premiums for the insurance, and the debtor is entitled to cancel the insurance if an when the load is repaid or refinanced. The premiums are based on a flat amount. The amount of insurance benefit must NOT exceed the total amount of indebtedness.
The coverage begins when the debtor becomes obligated to the creditor. The creditor, who normally is both the policyowner and the beneficiary, must apply the insurance proceeds to the discharge of the loan.
Industrial (Home Service)
Individual policies are issued to low-income workers without medical examination requirement. The premiums are collected weekly or monthly by the insurance agent servicing that particular area or paid directly to the insurer.
Industrial policies normally have a face amount of $1,000 or less and are written to reduce funeral costs. These policies are marketed house-to-house by a Debit Agent, also known as a Home Service Agent. The grace period is 4 weeks in length, with the method of settlement upon death being a lump sum.
Facility of Payment Clause
The insurer may pay to a relative or anyone it deems entitled to the benefits in the absence of a designated beneficiary.
Business Uses of Life Insurance
In addition to personal uses of life insurance, the business market also benefits from the purchase of life insurance. Business uses of insurance also mirror individual needs - to cover the unexpected death of business partners, executives, and key employees by providing funds for the continuation of the business, not for the heirs of the decedent.
Buy-Sell Agreement
This agreement contractually establishes a price with the intent to purchase, at a predetermined value, the assets of a business should one of the contract participants predecease the others. It may be used with a sole proprietorship, a partnership, or with stockholders of a closed corporation.
Any type of life insurance may be used to provide funds for the Buy-Sell Agreement. Premiums are not deductible, and policy proceeds are received income tax-free.
