Chpt 4 Group Life Insurance benefits

Question 1

Basic Group Term Life Insurance

A. Types of plans

Answer 1

1. Flat dollar plans
2. Multiple of earnings plans
3. Salary bracket plans
4. Position plans (insurance based on EE category)
5. Many plans include age related reductions in face amount insurance
   
   5. 1 Reduction must be actuarially cost justified under the Age Discrimination in Employment Act (ADEA)

Question 2

Basic Group Term Life Insurance

B. Plan provisions

Answer 2

1. Eligibility Provisions
   
   1. 1 usually full time EE working more than a minimum number of hours
   2. 2 actively-at-work requirement
   3. 3 Contribution plans typically 75% minimum participation
   4. 4 Evidence of insurability (e.g. Medical questionnaire) for large amounts
2. Continuity of Coverage Provisions and conversion rights
   
   2. 1 Insured’s right to convert group term insurance to individual upon termination of employment or term of the entire group plan
3. Disability Provision
   
   3. 1 Waiver of prem
   4. 2 Total and permanent disability
   5. 3 Extended death benefit
4. Benefit payment provisions
   
   4. 1 Benefit payable to beneficiary designated by the insured
   5. 2 Employer may not be named as beneficiary
   6. 3 Settlement options: lump sum, monthly installment, money market-like account
   7. 4 Accelerated benefits provisions for terminally ill
   8. 5 Viatical assignment: certificate holder sells their group coverage to a 3rd party for actuarial PV

Question 3

Basic Group Term Life Insurance

C. Federal income tax implications AND Statutory Considerations

Answer 3

1. Federal Income Tax Implications
   
   1. 1 Premium paid by ER deductible on ER’s income tax in US and Canada. Applies to most life and AD&D
   2. 2 Benefits excludable from beneficiary’s gross income in US and Canada. Applies to most life and AD&D products
   3. 3 Taxable Income and Employees
      
      1. 3.1 In US, EEs are taxed on the value of ER provided group term greater than $50,000
      2. 3.2 The first $50,000 is received tax-free
      3. 3.3 In Canada, ER payments life insurance is taxable
2. Statutory Considerations
   
   2. 1 Federal regulation
      
      2. 1.1 Group term life is subject to many provisions in ERISA
      3. 1.2 Any age related reductions in coverage be actuarially cost justified
   3. 2 State and provincial regulation
      
      2. 2.1 Do not permit individual selection of the face amount
      3. 2.2 Maximum EE contribution requirement
      4. 2.3 Minimum participation requirement
      5. 2.4 Other regulation based on NAIC model laws may apply

Question 4

Group Supplemental Life Plans

Types of Plans AND Plan Provisons

Answer 4

1. Type of plans
   
   1. 1 Additional insurance beyond basic group term, and are EE-pay-all
   2. 2 Generally a unisex premium. Premium rates vary by 5-year age brackets
   3. 3 Amount of insurance a choice of flat amounts or multiples of earnings
2. Plan Provisions
   
   2. 1 Generally the same as basic group term life
   3. 2 Disability provisions limited to WOP
   4. 3 minimum participation lower than for basic group term life
   5. 4 Evidence of insurability requirement more stringent
   6. 5 Suicide exclusion is common
   7. 6 Portability provisions for EEs who terminate employment
      
      2. 6.1 allow participants to continue group coverage by paying prem directly to the insurer
      3. 6.2 rates applicable to or table lives are typically higher (schedule F rates)
      4. 6.3 mortality experience on portable lives significantly worse than on similar active lives, reflecting anti-selection

Question 5

Group Supplemental Life Plans

Federal Income Tax Implications and Statutory Considerations

Answer 5

1. Federal Income Tax Implications
   
   1. 1 Taxable Income to Employees
   2. 1.1 EE-pay-all avoids imputed income consequences
   3. 1.2 Advantageous for basic and supplemental group life programs to be treated as separate plans
2. Statutory Considerations
   
   2. 1 Same federal laws as basic group term life
   3. 2 If the basic group term plan meets state minimum participation requirements, then supplemental plan’s participation can be less

Question 6

Group accidental death and dismemberment (AD_D)

Answer 6

1. Typically a companion coverage to group term life
2. Benefit payable if EE dies as the result of a covered accident
   
   2. 1 50% of benefit if the EE loses a member (e.g. Hand, foot, or sight of an eye)
   3. 2 If more than 1 member is lost, then full AD_D benefit is payable
3. Many ERs provide basic AD_D where amount is 100% of the basic group life amount
   
   3. 1 Supplemental AD_D plans on an employee-pay-all basis
4. Coverage may be either non-occupational (only covering accidents not related to employment) or 24-hour

Question 7

Dependent Group Life Insurance

Types of Plans AND Plan Provisions

Answer 7

1. Types of plans
   
   1. 1 Lump sum benefit to EE in the event of death of a covered dependent
   2. 2 Only available when EE group life insurance is in force
   3. 3 Predominantly EE-pay-all
   4. 4 Spouse amounts may be limited to some % of EE amount
   5. 5 Coverage on children
   6. 5.1 As a result of health care reform, many plans extended coverage to 26 to be consistent with medical plans
2. Plan Provisions
   
   2. 1 Eligibility provision
      
      2. 1.1 Usually the same as for health coverage, except newborns not eligible until age 14 days
      3. 1.2 Deferred effective date provision: deferred eff. date for dependent currently confined for medical treatment
      4. 1.3 Spousal coverage may require a medical questionnaire for higher amounts
   3. 2 Continuity of coverage provisions
      2. 2.1 Coverage continues only while EEs group term life coverage continues
      2. 2.2 Conversion rights consistent with EE coverage
      2. 3 Benefit payment provisions - Beneficiary is usually the EE, and benefits are typically a lump sum

Question 8

Survival Income Benefits

Types of Plans AND Plan Provisions

Answer 8

1. Type of Plans
   
   1. 1 Provide a monthly payment to the EE’s spouse and children on the EE’s death
   2. 2 Benefit is a percentage of the EE’s monthly earnings
   3. 3 Spouse benefit is payable until remarriage, attainment of a limiting age, or death
      
      1. 3.1 Children’s benefit is payable to age 19, or 23 if a full time student
2. Plan Provisions
   
   2. 1 Eligibility and continuity similar to Group Basic Term Life with 2 differences
      
      2. 1.1 Conversion privilege applies to PV of the monthly survivor benefit
      3. 1.2 Disability provision is limited to WOP (waiver of premium)
   3. 2 Benefit Payment provisions may include
      
      2. 2.1 Guaranteed benefit period
      3. 2.2 Maximum benefit period
      4. 2.3 Remarriage provision
      5. 2.4 Dowry provision: lump sum benefit payable on marriage
      6. 2.5 Social Security offset
      7. 2.6 Last survivor provision

Question 9

Survivor Income Benefits

Federal Income Tax Implications

Answer 9

1. Taxability of Proceeds
   
   1. 1 Each monthly payment composed of non-taxable portion and taxable interest portion
2. Taxable Income to Employees
   
   2. 1 survivor income benefits in US and Canada considered group term
   3. 2 May be imputed income on excess of $50,000 exclusion
   4. 3 imputed income based on commuted value of expected payments

Question 10

Group Permanent Life Insurance

Answer 10

1. Types of Plans
   
   1. 1 Single-premium group paid-up life
      
      1. 1.1 Level death benefit for a fixed premium, based on attained age
      2. 1.2 Includes a level face amount and growing cash value
   2. 2 Group ordinary life insurance
      
      1. 2.1 The group counterpart to individual whole life
      2. 2.2 A fixed life insurance amount, level premium, and a growing cash value
   3. 3 Group term and paid-up plan
      
      1. 3.1 Combo of paid-up life insurance paid by EE and decreasing term paid by ER
2. Plan Provision
   
   2. 1 Similar to group term with the following differences
   3. 1.1 No continuity of coverage necessary for group paid-up insurance
   4. 1.2 DI provision limited to WOP on the term portion of group term and paid up
   5. 1.3 Conversion privilege is limited to face amount less cash value for group ordinary life insurance
3. Tax Consideration
   
   3. 1 Imputes income based on conservative interest and mortality assumptions
   4. 2 EE pay-all may not generate imputed income under certain conditions (e.g. ER involvement in transaction is minimal)

Question 11

Group Universal Life Insurance -

Types of Plans

Answer 11

1. Consist of term life insurance and a side fund that accumulates with interest
2. Death benefit equals the term life component plus the side fund
3. 1 Level benefit: the term amount decreases as the side fund grows
4. 2 increasing benefit: if term amount is fixed as side fund grows
5. GUL premium
   
   3. 1 Prem credited to the fund net of prem tax, expense charges, and term cost
6. Credited interest rate is set by the insurer annually. There may be a guaranteed minimum rate

Question 12

Group Universal Life Insurance

-Plan Provision

Answer 12

1. Eligibility provision are similar to group supplemental
2. GUL continuity of coverage approaches:
   
   2. 1 WOP may apply to the term portion
   3. 2 Portability provision similar to supplemental life plans may apply
   4. 3 Accumulation fund may be used to purchase paid-up insurance on retirement or termination
   5. 4 Coverage may continue on a non-premium paying basis, with monthly costs withdrawn until fun exhausted
   6. 5 Conversion privilege may be provided
3. Death benefit payment provisions
   
   3. 1 Similar to group term life
   4. 2 Fund may be paid out as a surrender or a policy loan

Question 13

Group Universal Life Insurance

-statutory Considerations and Taxation

Answer 13

1. Statutory Considerations
   
   1. 1 Most laws applicable to group term apply to GUL
   2. 2 NAIC model illustration regulation ensures that illustrations do not mislead
2. Federal income tax implications
   
   2. 1 Interest accumulates in tax-deferred basis
   3. 2 Cash surrender taxable on the gain on surrender
   4. 3 Death benefit (term plus fund) payable tax free to beneficiary
   5. 4 If outside of section 79, no imputed income
3. If savings elements dominate, it is not considered life insurance, and all income immediately taxable

Question 14

Group variable universal life

GVUL

Answer 14

1. Similar to GUL plans, however under GVUL there are equity and fixed interest investment options
2. Plan provisions of GUL are found in GVUL
   
   2. 1 also, limits on withdrawals and movement of funds among investment options
3. Statutory considerations
   
   3. 1 most state and provincial laws applicable to group term apply to GVUL
   4. 2 GVUL is considered an investment product as well as insurance and is therefore subject to SEC and NASD regulation

Question 15

Group Credit Life Insurance

Answer 15

1. Provide a death benefit equals to the unpaid consumer debt of the insured
2. The creditor (usually a bank) is both the group policyholder as well as the beneficiary
3. Many jurisdictions have maximum rate limit to avoid excessive charges

Question 16

Dependent group life instance

Federal income tax and statutory considerations

Answer 16

1. Taxable income to employees
   1.1 in us, if amount less than 2000, benefits are excludable and result in no Imputed income to EEs
   1.2 in Canada, premium paid by the ER are taxable income
2. Statutory considerations
   2/1 some jurisdictions establish a maximum amount of insurance on dependents