Module 2: Managing Death Benefits Continued

Question 1

Contrast AD&D coverage provided on a 24-hour basis with coverage provided on a nonoccupational basis.

Answer 1

AD&D coverage may be provided on a 24-hour or nonoccupational basis. Coverage on a 24-hour basis (more prevalent) covers accidents that occur both on and off the job. Nonoccupational coverage (rare) does not provide coverage related to accidents at work. Nonoccupational coverage is more prevalent in industries where employees have Workers’ Compensation (WC) coverage.

Question 2

Explain why a typical AD&D group contract specifies a time limit for payment of benefits.

Answer 2

In a typical AD&D group contract, a benefit is payable for death or injury that occurs within a certain period, usually 365 days, following the date of an accident, since the longer the period of time between the accident and death or injury, the more difficult it is to assess the actual cause.

Question 3

Describe how accidental death is defined in most group AD&D insurance policies.

Answer 3

Most AD&D policies define accidental death as death resulting from accidental means (as opposed to simply being the result of an accident). A common definition is death that results, directly and independently of all other causes, either from bodily injury sustained by external, violent and accidental means or from accidental drowning. Accidental means that the action (i.e., the event that brings about the result) is itself a chance occurrence that is unintended and unexpected. If the action resulting in death was intentional, the death is not the result of accidental means. For example, if an individual dies of a drug overdose, the death is not the result of accidental means, even though the result may have been unexpected, because the action of taking the drugs was intentional.

Question 4

Identify circumstances under which most group AD&D insurance plans will specify that benefits are not payable. (4)

Answer 4

Most group contracts specify that AD&D benefits are not payable for any loss caused by or resulting from:

(a) Intentionally self-inflicted injuries, attempted suicide or suicide

(b) Declared or undeclared war, or any act of war (except if the group contract provides coverage for war risk)

(c) Full-time active duty in the armed forces of any country or international authority

(d) Flying as a pilot or crew member of any aircraft.

Question 5

Explain why the term “dismemberment” is a misnomer in the context of group AD&D insurance.

Answer 5

In the context of AD&D insurance, the term “dismemberment” is a misnomer because benefits are not restricted to dismemberment or the severance of a body part. Coverage includes the loss of use of certain body parts (e.g., hands, arms and legs) and/or faculties (e.g., sight, speech and hearing).

Question 6

Identify the most common types of ancillary benefits that can be included in group AD&D insurance.

Answer 6

The most common types of ancillary AD&D benefits are:

(a) Repatriation of remains in the event of death of a covered plan member outside a minimum distance from the plan member’s city or town of residence.

(b) Rehabilitation or the training necessary to enable the plan member to work at an occupation in which the plan member would not have been engaged if not for injuries resulting from the accident.

(c) Transportation of a family member in the event of a plan member’s hospitalization resulting from an accident where hospitalization occurs more than a minimum distance from the plan member’s place of residence.

(d) Seat belt provision pays an additional 10% of the principal sum if it is verified that the accident occurred while the covered plan member was in a private passenger-type vehicle and wearing a properly fastened seat belt at the time.

Question 7

Describe how AD&D benefit amounts are structured.

Answer 7

The principal sum is the benefit amount payable when an accidental death occurs, and also for other significant losses such as loss of both hands or feet, sight of both eyes, or both speech and hearing. The percentage of principal paid declines further as the magnitude of the loss declines. For example, loss of one arm or leg pays three-quarters of the principal amount. Loss of sight in one eye pays two-thirds of the principal sum, and hearing loss in one ear pays one-quarter. Some contracts provide payment of twice the principal sum for types of paralysis, such as quadriplegia, paraplegia and hemiplegia.

Question 8

Contrast optional AD&D insurance coverage with basic AD&D coverage.

Answer 8

Optional AD&D insurance coverage is similar to basic AD&D coverage in that this benefit is commonly offered on a 24-hour basis. It is different from basic AD&D coverage in that plan members pay the entire premium. Benefit amounts are typically in units of $10,000 or $25,000, up to a maximum. Optional AD&D plans also offer coverage for dependents, again at the plan member’s expense.

Question 9

Explain how premium rates are structured for optional AD&D insurance coverage.

Answer 9

Monthly premium rates for optional AD&D coverage are per $1,000 of insurance and are not differentiated by age or sex. Typically, there is one rate for plan-member-only coverage and another rate for family (plan member and dependents) coverage.

Question 10

Explain who has the right to name a beneficiary who will receive the death benefit, and provide an example of a life insurance benefit where the designated beneficiary is restricted.

Answer 10

The plan member has the right to name the beneficiary who will receive the death benefit. If the plan member did not name a beneficiary or if all named beneficiaries are dead when the insured dies, the contract may provide that the death benefit be paid to the insured’s estate. Certain types of life insurance benefits restrict who can be designated a beneficiary; for example, in the case of dependent life insurance, the plan member is automatically the beneficiary.

Question 11

Contrast beneficiary designation rights in Quebec with other jurisdictions.

Answer 11

In all jurisdictions except Quebec, the plan member can typically change or revoke the beneficiary at any time. In Quebec, the designation of a spouse as beneficiary for all life benefits is automatically considered irrevocable and cannot be changed unless it is explicitly stated that it can be changed.

Question 12

Outline requirements for changing the beneficiary designation in a group death benefit plan.

Answer 12

The group contract should stipulate that the insurer requires notice in writing on a form acceptable to the insurer of any changes in the beneficiary designation. A change to or revocation of the beneficiary designation takes effect on the date the plan member files it with the plan sponsor.

Question 13

Describe the facility of payment provision.

Answer 13

A facility of payment provision allows for the payment of a dollar amount stipulated in the group contract to an individual other than the beneficiary who is responsible for paying funeral costs and/or other costs associated with the illness or death of the plan member.

Question 14

Explain how an accelerated benefits payment is triggered.

Answer 14

Insurers may offer accelerated benefits, also called terminal illness benefits or living benefits. These benefits allow an insured who is diagnosed with a terminal illness and expected to die within a defined period of time (e.g., 12 to 24 months) to cash in a portion of the face value of the life insurance benefit while still living.

Typically, the triggering event for these benefits is a terminal illness. Some insurers require the plan member to be under 64 years of age. Insurers require a medical certificate certifying the plan member’s life expectancy. These claims are adjudicated on a case-by-case basis, and the specific medical conditions and/or conditional events that allow plan members to access benefits vary by insurer.

After a plan member has received an accelerated benefit, the insurer subtracts the accelerated benefit payment from the amount of life insurance payable when that plan member dies.

Question 15

Describe how continued coverage for disabled plan members can be provided in group life insurance plans

Answer 15

There are two approaches to providing continued life coverage:

(1) The most common way to continue life insurance coverage for disabled plan members is to include a waiver of premium provision in the group insurance contract. Under this provision, coverage may continue for disabled plan members, up to the period of time the group contract stipulates, while the insurer waives payment of the premiums. In fact, the insurer waives premiums and coverage continues even if the plan sponsor cancels the group contract with the insurer. Once the insurer has approved a waiver of premium, no changes can be made to the disabled plan member’s coverage.

(2) Some plan sponsors do not include a waiver of premium provision in the group basic life contract, opting to continue to pay the life insurance premiums for disabled plan members. In this case, the disabled plan members continue to receive coverage as though they were active plan members, and the plan sponsor continues to remit the regular premium for all covered individuals. If the contract is cancelled and there is no waiver of premium provision, the insurer no longer has to provide insurance to the disabled individuals. The plan sponsor, however, must still offer some type of coverage depending on the terms of the group contract and may request the new insurer provide coverage on a premium-paying basis.

Question 16

Describe how disabled plan members qualify for a waiver of premium under a group life insurance policy.

Answer 16

To qualify for a waiver of premium, plan members must become disabled before they reach a certain age, usually age 65. They must be totally disabled as defined in the contract. Generally, the plan member must be unable to be gainfully employed in an occupation for which they are qualified due to education, training or experience.

There are variations in the definition of disability. Another approach mirrors the definition of disability under long-term disability (LTD) benefits—that is, plan members cannot perform their own occupation for the first 24 months of LTD benefit payments and cannot perform any gainful occupation thereafter. The objective is to have the waiver of premium provision based on the definition of disability that applies to the LTD benefit, so the waiver of premium automatically starts when the insurer approves LTD benefit payments.

Question 17

Outline applications of the waiver of premium provision in group optional life insurance plans.

Answer 17

Group optional life insurance plans typically include a waiver of premium provision. Since plan members pay the premiums for this benefit, a waiver of premium provision is advantageous for plan members and streamlines administration. However, it adds additional costs to providing the insurance. The protection provided by the provision must be paid for by increasing the regular premium rate slightly for all active plan members.

Question 18

Explain how extension of coverage is usually provided in group life insurance plans when the service of active plan members is temporarily interrupted for reasons other than disability.

Answer 18

Group contracts generally address continuation of life coverage when the service of active plan members is temporarily interrupted (e.g., because of a temporary layoff, strike, lockout or leave of absence). The coverage is on a premium-paying basis for a defined period that varies by the type of benefit. The coverage is usually equal to that provided to active members at the time the individual temporarily left the plan sponsor’s service. Time limits on continuation of coverage give an insurer more control over potential losses, particularly with a leave of absence, since the longer the individuals are absent, the greater the chance they will face risks beyond the terms of the group contract.

Question 19

Outline conditions under which the insurer or plan sponsor can terminate a group life insurance contract.

Answer 19

Insurers can terminate a basic life group contract if the plan sponsor does not pay the premiums. There is usually a grace period of 31 days (from the premium due date) before contract termination occurs and during which the plan sponsor can pay premiums without penalty. In certain circumstances, an insurer can terminate the group contract on any premium due date if, for example, the plan sponsor does not retain the stated minimum participation rate in a nonmandatory plan.

Either party can terminate the contract by providing appropriate notice. The insurer must provide written notice of termination to the plan sponsor in advance, usually at least 31 days before coverage ceases. The plan sponsor may terminate the group contract at any time with advance notice in writing, usually 31 days.

Question 20

Outline situations in which an insured plan member’s group life insurance coverage is automatically terminated.

Answer 20

A plan member’s coverage automatically terminates when:

(a) The plan sponsor cancels the group contract.

(b) The plan member is terminated from active employment.

(c) The plan member experiences a change in employment that makes them ineligible for coverage under the plan—for example, moving outside the employment classes that are eligible for coverage under the plan.

(d) The plan sponsor does not pay the premiums for the entire plan within the grace period.

(e) The premium for the plan member’s insurance is not paid within the grace period, usually 31 days from the premium due date.

Coverage for a dependent terminates when the plan member’s coverage terminates and also when the dependent no longer qualifies as a dependent under the plan (e.g., a dependent child reaches the maximum age specified in the contract).

Question 21

Describe which right is generally conferred to the insured plan members by the conversion privilege in a group life insurance plan.

Answer 21

When group life insurance coverage ceases due to termination of employment or because the plan members are no longer eligible for coverage, individuals may be able to convert the face value of the benefits coverage to an individual life insurance policy without providing medical evidence of insurability. This may be in the form of permanent insurance, term insurance to age 65 or any other type of policy the insurer permits. Individuals must choose to convert their coverage within 31 days (while the group coverage remains in place). The maximum life insurance amount they can convert is the lesser of the group coverage or $200,000 in all provinces/territories, except in Quebec. Quebec residents are entitled to a conversion maximum of $400,000. The conversion privilege allows individuals to acquire a life insurance policy from various options the insurer offers. In practice, people rarely exercise the conversion privilege.

Question 22

Outline the conditions under which an insurer can contest the validity of a group contract.

Answer 22

An insurer can generally contest the validity of a group contract at any time if premiums are not paid. There is a limited period stated in the contract (typically two years), after which the insurer cannot contest the validity of the group contract on the basis of significant misrepresentation by the plan sponsor in its application. When an insured individual’s signed application contains a material misrepresentation (and the insured individual or the beneficiary has received a copy of the application), the insurer can deny claims within the specified time period.

Question 23

Explain how insurers address a misstatement of age after premium rates have been set.

Answer 23

When a benefit payable is age-sensitive and the plan member’s age has been misstated, the insurer can change the benefit amount to correspond to the amount the benefits schedule stipulates for the actual age and adjust premiums accordingly. Some group contracts stipulate that, in this situation, the amount payable is the benefit amount available as a result of the amount of premiums actually paid. Other insurers refuse benefit claims and refund premiums.

When a plan member’s age is understated, the plan sponsor (not the plan member) is responsible for making up the shortfall in premium payments, whether the plan is contributory or not. If age is overstated, the plan sponsor has the right to a refund. If the adjusted premium rate means an adjustment must also be made to the plan member’s contribution amount, both the plan member and plan sponsor must determine how to address the deficient or excessive contributions.

Question 24

Describe the income tax provisions that generally apply to plan sponsors providing group life insurance and AD&D insurance coverage.

Answer 24

Plan sponsor contributions to life insurance coverage for plan members are deductible as a business expense. Deductible contributions include premiums paid for life insurance coverage for either active plan members or retirees, premiums paid for dependent life insurance coverage, or up to $10,000 of direct uninsured payments of death benefits to the spouse or designated beneficiary of a deceased active plan member or retiree.

Question 25

Describe the purpose of the legislative provisions related to death benefits outlined in IT-508R, Death Benefits.

Answer 25

The purpose of these legislative provisions is:

(a) To ensure that amounts received as death benefits are included in the recipient’s income

(b) To allow an exclusion from income for up to $10,000 of the gross amount of death benefits attributable to a deceased taxpayer’s service in an office or employment.

Question 26

Define death benefit as outlined in IT-508R, Death Benefits.

Answer 26

The term “gross amount of a death benefit” means the amount(s) received by any taxpayer in a taxation year upon or after the death of an employee or former employee in recognition of that employee’s or former employee’s service in an office or employment. In general terms, a death benefit is the gross amount received by a taxpayer in a taxation year less an amount of up to $10,000 and is included in the recipient’s income.

Question 27

Explain the tax status of premiums paid and benefits received for basic life, dependent life, optional life, basic AD&D and optional AD&D.

Answer 27

The tax status of premiums paid and benefits received for basic life, dependent life, optional life, and basic AD&D is:

(a) If the plan sponsor pays the premium, the premium is taxable to the plan member.

(b) If the plan sponsor pays the premium, the benefit is not taxable to the beneficiary.

(c) If the plan member pays the premium, the benefit is not taxable to the beneficiary.

Question 28

Explain how premium tax is applied to group life insurance plans.

Answer 28

All provinces and territories charge a premium tax on insured benefits plan premiums. Ontario, Quebec, and Newfoundland and Labrador also charge a tax on claims costs and expenses under self-insured plans. The tax percentage varies. In Ontario and Quebec, these premium taxes are subject to provincial sales taxes.

Question 29

Describe the general approach used by plan sponsors for funding basic life insurance for small, midsized and large groups.

Answer 29

Plans for small to midsized groups (e.g., up to 500 lives) are usually insured on a nonrefund accounting basis, usually fully pooled. The life insurance premium for these plans is too low to permit any element of experience rating. It is possible for just one death or waiver of premium claim to put the plan into a deficit position. With a smaller spread of risk, these groups are best served by pooling their claims with groups of similar size and characteristics.

Plans for larger groups (e.g., 500 lives and over) have a sufficient spread of risk and more predictable claims experience results. These plans are typically prospectively rated, meaning that insurers take the plan sponsor’s experience into consideration when setting rates. The basic life benefit may be insured on a refund accounting basis, with or without a pooling arrangement to limit large losses. However, due to low incidence and high risk, plan sponsors typically choose a nonrefund arrangement. Most life insurance is deemed to be inappropriate for self-insurance because death benefit payments in excess of $10,000 are taxable to the beneficiary when provided on a self-insured basis.

Question 30

Identify the type of funding method that is appropriate for group AD&D insurance plans.

Answer 30

The fully pooled method is appropriate for all types of AD&D plans. The low incidence of claim combined with high benefit amounts dictates the necessity of such an arrangement, regardless of the size of the plan.

Question 31

Outline how benefits typically paid in a CI plan can be used by the insured individual.

Answer 31

An insured individual can use the lump-sum tax-free benefit however they wish. They may choose to pay for:

(a) Ongoing medical expenses or experimental treatments

(b) Medical expenses not covered by provincial, territorial or other private insurance plans

(c) Expenses associated with lifestyle or mobility changes resulting from the illness

(d) A vacation or other activities that would not be affordable otherwise.

Question 32

Explain when benefits provided under a CI plan are paid.

Answer 32

The insurer pays the CI benefit after a survival period of 30 days (sometimes 180 days for multiple sclerosis and paralysis) following diagnosis of the covered illness. For some illness (e.g., major organ transplant or coronary artery bypass), payment is based on the date of surgery, rather than the date of diagnosis.

Question 33

Explain preexisting conditions limitations under a CI plan where benefits are not paid.

Answer 33

Insurers usually include a preexisting conditions limitation, with most excluding coverage during the first two years for any diagnosed condition or for which the insured individual received medical treatment during the two years prior to the start of coverage (referred to as a 24/24 preexclusion). Under a 24/24 preexclusion, covered conditions are excluded from coverage when all the following are true:

(a) The insured had a preexisting condition during the 24-month period before the start of coverage.

(b) The critical illness is related to that preexisting condition.

(c) The critical illness is diagnosed within 24 months after the coverage is in effect.

Some insurers exclude all coverage for cancer during the first 90 days of the coverage, whether or not from preexisting conditions.

Question 34

Explain why claims adjudication costs are lower for CI benefits than for LTD benefits.

Answer 34

Claims adjudication costs are lower for CI benefits than for LTD benefits because of the lump-sum payment.

Question 35

Explain the tax treatment of CI insurance.

Answer 35

CI insurance is classified as a group sickness or accident insurance plan under the Income Tax Act (ITA). Plan sponsor contributions are taxable to the plan member, and benefits are received tax-free.