Module 1: Managing Death Benefits Flashcards
Explain why government-sponsored death benefits do not impact the design or amounts paid in group plans
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).
Describe the types of death benefits commonly provided in group insurance plans
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).
Identify who is generally provided coverage for basic life insurance and who usually pays the premiums in group insurance plans.
Basic life insurance is generally provided for all active, permanent employees, and premiums are usually paid by the plan sponsor.
Outline the basic characteristics of yearly renewable term insurance.
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.
Outline reasons for providing basic life insurance benefits from a plan sponsor’s perspective.
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.
Outline advantages of group term life insurance from a plan member’s perspective. (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.
Outline disadvantages of group term life insurance compared to individual life insurance.
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).
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).
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.
Explain how group size impacts participation rates set by insurers.
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.
Explain how the amount of basic life insurance coverage is determined for a group life insurance plan member.
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.
Discuss how human rights legislation restrictions impact determination of life insurance coverage in group life insurance plans.
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.
Differentiate between an earnings schedule and a flat benefits schedule for basic life insurance.
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.
Outline insurer requirements when a group life insurance plan member moves from one class to another as specified in the plan’s benefits schedule.
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.
Explain how insurers can protect against adverse selection in group life insurance contracts.
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.
Explain how the nonevidence maximum (NEM) is calculated.
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.
Explain how the overall maximum (OM) is calculated.
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.
Explain the significance of the combined maximum.
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.
Identify situations in which plan members are required to provide evidence of insurability for life insurance.
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.
Outline participation rates generally required by insurers for basic life insurance and optional life insurance in group life insurance plans.
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.
Identify events that trigger automatic enrollment of eligible group members and dependents in a mandatory group life insurance plan.
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.
Describe how reduction provisions are applied to basic group life insurance plan members who work past the historical normal retirement age of 65.
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.
Explain the impact of the entry of younger plan members on a growing organization’s basic life insurance premium rates.
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.
Discuss typical characteristics of optional life insurance coverage.
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.
Describe how optional life benefit amounts are typically determined.
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.
