Group Life Insurance

Question 1

List 3 Characteristics of Group Life

What association suggests a model and what are the 9 standards or characteristics that most states adopt?

Answer 1

• To qualify the group must be a “natural group” created for some other reason than to obtain group insurance and unrelated.
• Employers buy group life coverage for the benefit of the employees.
• group insurance is a form of annually renewable term insurance (though a form of group permanent life insurance is available)

The National Association of Insurance Commissioners (NAIC) model :

1. A group must cover at least 10 persons under one master policy.
2. Individual medical examinations not required.
3. The master policy is issued to the employer, trust, or labor union; the participant receives a certificate of insurance.
4. The insurance must be bought for the benefit of participants.
5. Premiums are based on the entire group, not individuals
6. Individuals do not choose the benefit levels making the plan nondiscriminatory
7. Premium rates are fairly constant.
8. Group life insurance is less expensive than individual life insurance for any given death benefit amount.
9. Most plans provide coverage amounts linked to the individual’s salary in one way or another.

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.

Many states prohibit the employer from being named as beneficiary.

Question 2

Who holds the Master Policy for group insurance and who holds the Certificate of Insurance?

Answer 2

• The group sponsor receives a master policy, which indicates the sponsor as policyowner and premium payor.
• The insureds are given a certificate of insurance. Each individual insured names his or her beneficiary or beneficiaries.

Question 3

List the 6 provisions of a Group Life Standard Policy

[II-BEG-C]

• I incontestible 2 yrs
• I insurability
• B beneficiary
• E entire contract
• G grace period 31 days
• C convertible without proof

Answer 3

Like individual life insurance policies, group life policies are characterized in part by certain standard provisions, including:

1. a grace period (typically 31 days) for paying the premium after the due date;
2. incontestability after two years except for nonpayment of premiums and fraudulent misstatements on the application;
3. entire contract provision stating that only the application and policy document constitute the policy;
4. a provision setting forth conditions, if any, under which the insurer can require an individual participant to provide evidence of insurability;
5. a provision giving participants the right to designate their beneficiary; and
6. 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.

Question 4

Define Contributory vs. Noncontributory Group Plans

When are contributory plans used most often?

What is the biggest rule with noncontributory plans?

Answer 4

Group insurance plans may be…

1. premiums may be split between the sponsor and the plan participants (contributory) and are most commonly group health insurance plans.
2. funded entirely by the plan sponsor (noncontributory) and must cover all eligible group members with a minimum participation of 75%

Question 5

A Conversion Privilege is most important for whom?

Gives you the right to convert to … without having to provide …

[ILEG]

I insurability no required

L limited amount

E equal face value

G grace period 31 days

Answer 5

Group term life insurance coverage normally ends when a person leaves the group which is a problem for the uninsurable.

• all group life has the right to convert to individual life of equal face amount
• with no evidence of insurability.
• Must be requested within 31 days grace period following termination or retirement from the group.
• The conversion amount is limited to the lesser of $2,000 or the amount of coverage at the date of termination.

Question 6

What is the most important distinction of an Eligible Group?

List 5 Types of Plan Sponsors (MMALE)

Answer 6

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

Types of Plan Sponsors:

• employer/employee groups
• association groups
• labor union groups
• multiple employer trusts (METs)
• multiple employer welfare arrangements (MEWAs)

Question 7

What is a MET and what are the 3 rules?

What is a MEWA and what are the 3 rules?

Answer 7

Multiple Employer Trusts (METs) +

• Some states allow 2 or more employers to form a trust to buy group insurance for their employees.
• Employers in a MET must be in the same industry.
• The group must have a minimum of 100 employees.

Multiple Employer Welfare Arrangements (MEWAs)

(insured vs. self-insured)

To be self-insured, the MEWA must

• get a certificate of authority from the state in which it is formed
• must submit reports similar to those required of an insurance company.
• self-insured MEWAs must have at least 5 employers and 200 employees.

Question 8

Group Underwriting Requirements

Answer 8

Group underwriting focuses on the group as a whole, not on the individual participants.

• larger the group, the easier to predict future losses
• 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 has enrolled for the insurance;
• confirm that all applications 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.

Question 9

What are the 2 rights of Assignability?

What is a viactical settlement?

Answer 9

Although the group life policyowner is the employer or association, insured employees have certain rights.

• the right to name a beneficiary.
• 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 so, then the covered employee can exercise a viatical settlements which is the sale of a policy owner’s existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Intended to get cash to for the terminally or chronically ill.

Question 10

When is Credit Life Insurance used and what type insurance is it?

Answer 10

Credit life insurance is designed specifically to cover the life of a borrower in the amount of his or her outstanding loan.

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.