Module 1: Managing Death Benefits

Question 1

Explain why government-sponsored death benefits do not impact the design or amounts paid in group plans

Answer 1

The Canada Pension Plan/Quebec Pension Plan (CPP/QPP) and Workers’ Compensation (WC) are the only government-sponsored programs that pay death benefits. CPP/QPP provides a modest lump-sum death benefit and pays monthly survivor benefits to the spouse and/or dependent children based on the age of the surviving spouse and the number of dependent children.

WC plans are not government funded but are government mandated in all provinces and territories. In general, death benefits from these plans are higher than under CPP/QPP, though payments vary significantly by jurisdiction. All jurisdictions provide for an initial lump-sum benefit to defray the immediate costs resulting from a worker’s death and pay a pension to the surviving spouse. Some jurisdictions provide additional pensions for dependent children, and a few provide a lump-sum payment that varies based on the age of the surviving spouse/children.

Government death benefits are relatively modest, so the fact that they are available does not affect the design of group plans or the amounts they offer. Note, as well, that WC applies only in limited situations (e.g., occupational deaths and when WC coverage is mandatory).

Question 2

Describe the types of death benefits commonly provided in group insurance plans

Answer 2

Basic life insurance is the most prevalent death benefit provided in group insurance plans. Other death benefits that plan sponsors may choose to add to the basic life plan include optional life, dependent life, and basic and optional accidental death and dismemberment (AD&D).

Question 3

Identify who is generally provided coverage for basic life insurance and who usually pays the premiums in group insurance plans.

Answer 3

Basic life insurance is generally provided for all active, permanent employees, and premiums are usually paid by the plan sponsor.

Question 4

Outline the basic characteristics of yearly renewable term insurance.

Answer 4

The most common form of life insurance is yearly renewable term insurance. The insurance contract automatically renews each year, provided the plan sponsor accepts the terms and conditions the insurer proposes.

Term insurance provides death benefits for a limited period and pays a benefit only if the insured dies during the term of coverage. If the insured does not die within that period, the protection expires without any cash value.

Question 5

Outline reasons for providing basic life insurance benefits from a plan sponsor’s perspective.

Answer 5

From a plan sponsor’s perspective, offering this element of financial security can enhance plan member morale and productivity as well as the competitiveness of the plan sponsor’s benefits plan. It also helps maintain positive public and plan member relations.

Question 6

Outline advantages of group term life insurance from a plan member’s perspective. (6)

Answer 6

From a plan member’s perspective, advantages of group term life insurance include:

(a) It adds a layer of protection to personal savings, individual life insurance and government-sponsored death benefits

(b) Death benefit payments are not taxable to the beneficiary

(c) It allows plan members to obtain coverage for spouses and dependent children in optional plans paid through payroll deductions

(d) It may reduce plan member anxiety about the consequences of possible premature death

(e) Terminated plan members may be able to convert their group insurance to individual insurance without providing evidence of insurability

(f) Plan members who might be uninsurable or subject to substandard ratings under individual life insurance policies can access coverage.

Question 7

Outline disadvantages of group term life insurance compared to individual life insurance.

Answer 7

Disadvantages of group term life insurance compared to individual life insurance include:

(a) Group term life insurance is available only if the plan sponsor continues the plan. While few plan sponsors terminate their plans, a business failure can leave plan members without coverage. In this scenario, the plan members have access to a conversion privilege; however, many may not exercise this provision because of the high cost of conversion for older individuals.

(b) Group term life insurance is portable only to the extent that coverage can be converted to an individual policy at termination

(c) Group term life insurance provides life insurance protection only, while individual life insurance policies may offer other features such as a savings or a cash-value feature that may benefit some plan members

(d) Unless a plan offers optional and dependent life, standard schedules of insurance may not provide coverage that reflects a plan member’s needs (e.g., if the amount of benefits is a multiple of salary, this may result in underinsurance of younger plan members with dependents).

Question 8

Describe the condition that must be met by eligible employees in single-employer group contracts before coverage starts in group life insurance plans. Explain why the conditions for eligibility differ in a multi-employer plan (MEP).

Answer 8

In single employer plans, generally, only active, permanent employees are eligible for basic life insurance. In most single-employer group contracts, employees are eligible for coverage only if they are not absent from work due to sickness, injury or any other reason on the date coverage would normally begin. For absent employees, coverage becomes effective once they return to work.

Members of MEPs do not have to be actively at work full-time to be eligible for coverage. As MEPs are common to industries that experience varied work patterns, making this a condition of eligibility would likely result in plan members losing their rights to benefits for extended periods. In a MEP, eligibility provisions are typically based on hours worked or dollar contributions to the trust fund that an employer makes on behalf of the employee.

Question 9

Explain how group size impacts participation rates set by insurers.

Answer 9

The participation rate is the number of individuals enrolled in a group plan expressed as a percentage of the total number of individuals in the group who are eligible to participate. Participation requirements vary by insurer. Group size is a consideration when insurers set these requirements. The larger the group, the better the spread of risk and the more consistent the average age and health of the group will remain from year to year. Generally, the smaller the group, the higher the required participation rate. Since most basic life plans are mandatory, meaning that plan members cannot opt out of benefits, the concept of participation rates is most relevant for optional benefits.

Question 10

Explain how the amount of basic life insurance coverage is determined for a group life insurance plan member.

Answer 10

The amount of life insurance coverage plan members are eligible for depends on the method of benefit calculation the plan sponsor chooses. Plan members are assigned to various classes under the group insurance contract, and the benefits schedule that applies to a given class determines the amount of life insurance. A benefits schedule can be based on earnings for one class and be a flat amount for another class.

Question 11

Discuss how human rights legislation restrictions impact determination of life insurance coverage in group life insurance plans.

Answer 11

Because benefits schedules must comply with human rights legislation containing antidiscrimination statutes, class descriptions are fairly broad. For example, plan members may be described as “with dependents” or “without dependents” rather than as “married” or “unmarried” since the latter option would be considered discrimination on the basis of marital status. Beyond the issue of discrimination, the “married” or “unmarried” classification does not address the relevant issue that an unmarried plan member may have more dependents than a married plan member.

Question 12

Differentiate between an earnings schedule and a flat benefits schedule for basic life insurance.

Answer 12

Under an earnings schedule, coverage is based on a percentage or multiple of the plan members’ annual earnings, usually one to three times earnings. “Earnings” generally include base salary only (e.g., excluding bonuses and dividends from profit-sharing programs). The benefit amount is usually rounded to the next higher $1,000 and is subject to a maximum amount.

Under a flat benefits schedule, all plan members grouped under the same class receive the same benefit amount, predetermined by the plan sponsor, regardless of earnings or position. Flat benefits schedules are common among union groups covering hourly paid members. They are also preferred by plan sponsors who want to provide a minimal amount of life insurance.

Question 13

Outline insurer requirements when a group life insurance plan member moves from one class to another as specified in the plan’s benefits schedule.

Answer 13

When plan members move to another class described in the plan’s benefits schedule, the plan sponsor must inform the insurer, typically within one month. If the change entitles the plan members to increased benefit amounts, they may have to submit evidence of insurability for approval by the insurer before the additional benefit amount becomes effective.

Question 14

Explain how insurers can protect against adverse selection in group life insurance contracts.

Answer 14

If insurance is available at the same price to plan members facing widely varying risks, then those facing the greatest risks are more likely to buy insurance. Adverse selection occurs when plan members select the benefits they are most likely to use if they have the choice. If left unchecked, it makes underwriting unprofitable. Insurers can protect against adverse selection by including benefit limits and maximums as well participation and evidence of insurability requirements and by restricting the times/events when plan members can make changes to coverage.

Question 15

Explain how the nonevidence maximum (NEM) is calculated.

Answer 15

The NEM is the maximum amount of insurance a plan member can obtain without having to provide evidence of insurability. The NEM is calculated using a formula, generally unique to each insurer, which considers such factors as size of the group (e.g., number of plan members), amount of the annual premium, average amount of insurance per plan member, and nature of the risk or type of industry. Some insurers exclude those who have significantly higher insurance amounts (e.g., the company’s president) when determining the average amount of insurance per plan member.

Question 16

Explain how the overall maximum (OM) is calculated.

Answer 16

The OM applies to the total amount of insurance up to and in excess of the NEM. It represents the maximum amount of life insurance the insurer will issue on any one individual in the particular group for a particular benefit. The OM is usually calculated according to a formula that considers the size of the group, the average amount of insurance per plan member, the amount of the annual premium and the reasonableness of the schedule of insurance. Some insurers exclude those who have significantly higher insurance amounts (e.g., the company’s president) when determining the average amount of insurance per plan member.

Question 17

Explain the significance of the combined maximum.

Answer 17

The combined maximum is the maximum amount of life insurance risk an insurer is willing to accept on any one individual in a particular group. It applies to combined amounts of basic and optional life as well as to combined amounts of basic and optional AD&D coverage.

Question 18

Identify situations in which plan members are required to provide evidence of insurability for life insurance.

Answer 18

Insurers will request evidence of insurability from plan members who:

(a) Choose optional life insurance coverage

(b) Apply for benefit amounts that exceed the NEM

(c) Are considered late applicants, that is, if they apply for coverage more than 31 days after the original date of eligibility

(d) Refuse coverage at the time of original eligibility and later want to join the plan.

Some insurers may also request evidence of insurability for all plan members when the insured group is small. This limit varies by insurer.

Question 19

Outline participation rates generally required by insurers for basic life insurance and optional life insurance in group life insurance plans.

Answer 19

The minimum participation rate depends on whether the plan is mandatory or nonmandatory. For basic life plans that are mandatory, 100% participation is generally required unless the plan has evidence of insurability requirements. For nonmandatory basic life insurance plans, insurers generally require participation of at least 75% of eligible group members. If participation is less than 75%, all coverage is usually subject to medical evidence of insurability. For larger groups, insurers sometimes permit a lower participation rate without medical evidence requirements.

For optional life plans, insurers typically have a minimum participation requirement of 10% or ten members.

Question 20

Identify events that trigger automatic enrollment of eligible group members and dependents in a mandatory group life insurance plan.

Answer 20

All eligible group members and dependents are automatically enrolled in a mandatory group life insurance plan upon one of the following events:

(a) The effective date of the group benefits plan

(b) The eligible individual’s date of employment

(c) The eligible individual’s completion of the waiting period, if any

(d) For smaller groups, on receipt of satisfactory evidence of insurability.

Question 21

Describe how reduction provisions are applied to basic group life insurance plan members who work past the historical normal retirement age of 65.

Answer 21

To address the higher cost of providing life insurance coverage to plan members who work past the historical normal retirement age of 65, the benefits schedule may include a reduction provision through which benefits begin to reduce when an individual reaches a specified age. Examples of reduction provisions are:

(a) Reducing benefits by a set percentage (e.g., the benefit amount for plan members currently covered for 100% of their annual earnings is reduced by 50% when they turn age of 65)

(b) Reducing benefits gradually beginning when plan members turn age 65
(e.g., reducing by 10% to 20% annually over a stated number of years or until a predetermined amount of benefits coverage is reached)

(c) Limiting benefits to a flat dollar amount when plan members turn age 65.

Question 22

Explain the impact of the entry of younger plan members on a growing organization’s basic life insurance premium rates.

Answer 22

If a plan sponsor’s organization is growing, the entry of new, younger plan members balances the effect of the aging of the plan members currently covered, stabilizing both the average age while the group contract is in force and the premium rates.

Question 23

Discuss typical characteristics of optional life insurance coverage.

Answer 23

An individual must be enrolled for basic coverage to be eligible for optional coverage. It is always funded by plan member contributions and can be added either as a rider, i.e., an addition or supplement to the basic contract, or issued as a separate contract. While this coverage is typically offered to plan members, plan sponsors may extend the benefit to cover spouses and, less frequently, dependent children. Optional life insurance usually excludes death from suicide for the first two years of coverage.

Optional life insurance coverage typically requires evidence of insurability, usually of the short-form variety, i.e., a health questionnaire with five or six questions. The medical underwriting process is streamlined to permit quick turnaround on applications and keep administrative costs to a minimum.

Question 24

Describe how optional life benefit amounts are typically determined.

Answer 24

Plan members can elect an amount of insurance, usually in multiples of salary or units of $10,000 or $25,000, subject to a specified maximum. The maximum varies by insurer, ranging from $100,000 to $500,000 or more. Amounts of insurance for spousal coverage are in the same increments as the plan member’s but may not exceed the amount of the member’s optional life coverage.

Question 25

Compare optional life insurance with individual life insurance.

Answer 25

Optional coverage is like individual life insurance in that plan members select their own amounts of insurance and must submit evidence of insurability. Rates for optional life tend to be lower than the rates for individual life. Coverage remains in force only if the group plan remains in force and the group policyholder continues to cover the insured individual.

Question 26

Explain why underwriting requirements for optional life insurance are more restrictive than for basic life insurance coverage.

Answer 26

Underwriting requirements for optional life insurance are more restrictive than for basic coverage because the risk of adverse selection increases once plan members are permitted to select their benefit amounts. Insurers usually require evidence of insurability for all amounts of optional life insurance.

Question 27

Explain the rationale for providing an open enrollment period for a new optional life insurance plan.

Answer 27

For new group plans, there may be an open enrollment period, which provides incentive for eligible plan members to participate and can help achieve higher levels of participation. During this period, typically within 31 days of the effective date of the plan, the insurer waives evidence of insurability requirements; however, most insurers stipulate a maximum coverage amount that can be provided without evidence of insurability.

Question 28

Describe how “dependent” is typically defined in group dependent life insurance plans.

Answer 28

A plan member must be enrolled for basic coverage to be eligible for dependent life coverage. A dependent is typically defined as:

(a) A plan member’s spouse (legally married or common law) The common law definition typically includes a partner of the same or opposite sex who has been living with the plan member for at least 12 consecutive months.

(b) Unmarried children (including stepchildren and adopted children) of the plan member and/or spouse between a specified age range, usually from birth or14 days to 21 years (25 years if in full-time attendance at school), who are dependent solely on the plan member for financial support.

Dependent children who are insured under the plan and who become mentally or physically incapacitated may continue to be covered beyond the age limits, provided they continue to be dependent on the plan member for financial support.

Question 29

Explain how adverse selection is minimized in a group dependent life insurance plan.

Answer 29

There are restrictions on coverage selection in a group dependent life insurance plan to prevent adverse selection. If an insured group member selects dependent coverage, all individuals qualifying as dependents under the plan are automatically covered. A plan member cannot choose to add life insurance coverage only for specific individual dependents. However, some optional dependent life insurance group contracts allow plan members to elect spouse-only or children-only coverage.

Question 30

Describe typical dependent life benefit amounts.

Answer 30

The dependent life benefit amount is generally a modest flat dollar amount, ranging from $5,000 to $25,000 for the spouse and $2,500 to $12,500 for each child, though this can vary depending on the benefits schedule. A typical benefits schedule is $5,000 for spouse coverage and $2,500 for each dependent child.

Question 31

Identify types of premium rate structures used for group dependent life insurance plans.

Answer 31

As the benefit amount is modest, premium rates for core dependent life insurance are low, and the rate structure is simple. Insurers generally use a single flat rate that does not consider the number of dependents covered. All insured group members with dependents are subject to the same premium rate for dependent life insurance.