Objective 1

Question 1

Types of plans - basic group term life

Answer 1

1. flat dollar plans - such as $x for all employees
2. multiple of earnings plans (most common) - such as 1 or 2 times earnings
3. salary bracket plans - salary ranges are established and benefits vary by range
4. position plans - benefits vary based on the employee’s position in the company (e.g. hourly vs. non-officer management vs. officer)

Question 2

Eligibility provisions - life insurance

Answer 2

1. most require ees to work at least 20 hours a week
2. require ees to be actively at work before life insurance becomes effective
3. typically require 100% participation on plans where no ee contribution is required and at least 75% participation on contributory plans
4. plans may also require ees to provide medical evidence of insurability for amounts in excess of a defined threshold

Question 3

disability provisions

Answer 3

1. waiver of premium - coverage continues without premium payment when an employee becomes totally disabled
2. total and permanent disability - when an insured becomes totally and permanently disabled, a benefit is paid on a monthly basis. Upon death, the original death benefit is reduced by any disability payments made.
3. extended death benefit - pays the death benefit if the insured’s coverage terminates upon total disability prior to age 60 and the insured remains disabled and dies within one year

Question 4

federal income tax implications

Answer 4

1. deductibility of premiums - employer premium payments are generally deductible on the employer’s income tax return in both the US and Canada
2. taxability of proceeds - death benefits for basic group term life insurance are excludable from a beneficiary’s gross income in both the US and Canada
3. taxable income to employees in the US
4. taxable income to employees in Canada - employer payments are taxable. Applies to all plans except ADD, which is only taxed in Quebec

Question 5

Taxable income in the US - group life

Answer 5

1. Under Section 79 of Internal Revenue Code, employees are taxed on the value of employer-provided group term life insurance in excess of $50K
2. The value of insurance in excess of $50K is determined from Table I.
3. Imputed income is based on excess coverage
4. imputed income = (table I rate * (coverage amount - 50K ) / 1000 ) - ee contributions
5. favorable tax treatment only applies to non-discriminatory plans

Question 6

Differences between basic group life and group supp life

Answer 6

Group supp life has:

1. If a disability provision is included, usually only waiver of premium is offered
2. minimum participation requirements tend to be lower, such as 25%
3. evidence of insurability requirements are more stringent
4. it is common for ee-pay-all plans to include portability option, allowing participants who terminate coverage to continue their group coverage by paying premiums directly to the insurer

Question 7

Federal income tax implications - group life

Answer 7

1. plans are usually employee-pay-all so that they can be considered outside Section 79, thereby avoiding imputed income consequences
2. straddle test - step rates must be either all at or below, or all at or above Table I rates.
3. If passes straddle test, generally advantageous to treat the basic and supplemental plans separately for Section 79 employees.
4. statutory considerations - the laws and regulations that apply to basic group term life also apply here

Question 8

ADD provisions

Answer 8

1. coverage is typically offered as a companion to group term life insurance
2. benefit is percentage of face amount and is paid when a loss is the result of a covered accident
3. many employers provide a basic plan were ADD face amount is 100% of basic group life insurance face amount
4. supplemental ADD plans may also be offered on a voluntary (ee-pay-all) basis. These plans may also provide coverage to spouses and children
5. business travel accident coverage is a common specialized form

Question 9

Description of dependent group life insurance

Answer 9

1. coverage provides lump sum to ee upon death of covered dependent
2. dependents were historically spouses and children. now can include domestic partners and their children.
3. now is predominantly ee-pay-all with larger benefits
4. multiple coverage options, up to 100K
5. to avoid anti-selection, spousal coverage may be limited to 50% of ee coverage amount, and premium rates based on age
6. child coverage normally ends at age 19, but this can be extended if child attends college

Question 10

Provisions of dependent group life insurance

Answer 10

1. eligibility provisions
   a. newborn children may not be covered until 14 days old
2. continuity of coverage provision - same conversion rights for ee coverage usually also apply to dependents. These rights typically also apply when coverage ends due to divorce or the child reaching the limiting age.
3. benefit payment provisions - the beneficiary is usually the ee, with benefits paid in a lump sum

Question 11

Description of survivor income benefits

Answer 11

1. provides a monthly payment in lieu of a lump sum death benefit
2. typically a percentage of the ee’s monthly earnings, such as 25% for a spouse and 15% for a child
3. typical spouse benefit is payable until the earliest of remarriage, limiting age, or death. for child, it’s payable until age 19, or 23 if full time student
4. these plans are less common today

Question 12

benefit payment provisions - survivor income benefits

Answer 12

1. guaranteed benefit period, regardless of surviving spouse’s death or remarriage
2. maximum benefit period
3. remarriage provision
4. dowry provision - provides lump sum benefit upon remarriage of the spouse
5. offset of SS survivor benefits
6. a last survivor provision, where benefits depend on the number of eligible survivors

Question 13

Federal tax implications - survivor income benefits

Answer 13

1. taxability of proceeds - each monthly payment is considered to be composed of a non-taxable portion and a taxable interest portion
2. taxable income to ees - these benefits are considered group term life insurance, so they may lead to imputed income in US

Question 14

Types of group permanent life insurance plans

Answer 14

1. single premium group paid-up life insurance - a level death benefit is provided for a fixed premium, based on attained age
2. group ordinary life insurance - group counterpart to individual whole life insurance
3. group term and paid-up plans - a combination of group paid-up insurance paid by the ee and group term life insurance paid by er

Question 15

difference between group permanent life ins and group term life

Answer 15

permanent has:

1. no continuity of coverage provisions are needed for paid-up
2. disability provision is usually limited to waiver of premium on the term portion of group term and paid-up insurance
3. the conversion privilege is limited to the face amount less cash value fro group ordinary life insurance

Question 16

Tax considerations - group permanent life insurance

Answer 16

1. in US, employer group permanent life insurance is subject to onerous tax treatment under Section 79, which is why it is rarely provided
2. coverage can be provided outside Section 79 if it is ee pay all and meets other specific conditions

Question 17

Description of plans - group universal life (GUL)

Answer 17

1. group conterpart to individual universal life plans. consist of term life insurance component and side fund that accumulates with interest
2. coverage on dependent spouses and children may also be included
3. death benefit is defined as the sum of the term life component plus the side fund
4. premium is flexible, but the minimum must be enough to pay for the term insurance for that period. amounts beyond that point accumulate in the side fund
5. credited interest rate is set by the insurer, and is commonly reset annually. there may be a guaranteed minimum rate (3-4%)

Question 18

Plan provisions - GUL

Answer 18

1. eligibility provisions are similar to group supplemental or optional life plans
2. continuity of coverage is provided through some combination of waiver of premium disability, portability, and conversions
3. the benefit payment provisions are similar to group term life insurance

Question 19

Tax favorability of GUL outside of Section 79

Answer 19

1. The interest accumulates on a tax-deferred basis
2. on surrender, interest accumulations are only taxable to the degree they exceed the term costs plus premium tax ans expense charges
3. the death benefit is payable tax free

Question 20

Difference between GUL and group variable universal life (GVUL)

Answer 20

GVUL have several investment options for the cash accumulation fund

Question 21

Description of group credit life insurance

Answer 21

1. insurance pays a death benefit equal to the unpaid consumer debt of the insured
2. creditor (usually bank) is the beneficiary
3. premium is paid by debtor
4. many jurisdictions have set forth maximum rates in order to avoid excessive premiums

Question 22

High level bullet points of group long-term disability

Answer 22

1. definition of disability
2. elimination period
3. benefit period
4. benefit amounts
5. benefit offsets
6. limitations and exclusions
7. optional benefits
8. self-insured LTD plans
9. voluntary LTD plans

Question 23

Definition of disability - group long term disability

Answer 23

1. ee is unable to perform some or all of material and substantial duties of an occupation and has loss of earnings
2. own occ vs. any occ
3. someone working part time can qualify, as long as income is reduced by stated percentages

Question 24

Elimination period - group long term disability

Answer 24

1. period of time that covered ees must be disabled before they are eligible to collect benefits
2. commonly 3 or 6 months
3. some enhancements like partial disability

Question 25

Benefit period - group long term disability

Answer 25

1. once begun, continue for length of benefit period

2. most common is 2 years, 5 years, to age 65

Question 26

benefit amounts - group long term disability

Answer 26

1. monthly benefits typically equal to defined percentage of pre-disability earnings
2. costs per dollar of benefit increase as the percentage of income insured increases
3. taxes must be considered when determining the appropriate replacement percentage

Question 27

benefit offsets - group long term disability

Answer 27

1. LTD benefits are almost always offset by income from other sources, such as SS, retirement benefits, worker’s comp, and part-time work
2. offsets ensure that the sum of disability income benefits and other income received does not exceed pre-disability earnings
3. for SS benefits, the employer must decide whether family benefits will be included with the primary benefit when determining the offset.
4. LTD insurers often help their claimants apply for SS benefits because obtaining the benefits creates advantages
   a. reduces cost of insurance program
   b. employee receives higher income replacement since SS benefits aren’t fully taxed
   c. allows continued SS credits for disabled individual
   d. qualifies the disabled person for Medicare benefits
5. methods for reducing benefits
   a. proportionate loss formula
   b. 50% offset
   c. work incentive benefit - ignores all earnings, except benefits are capped so that work earnings plus benefits do not exceed pre-disability earnings

Question 28

Limitations and exclusion - group long term disability

Answer 28

1. special conditions limitation clause - it is common to limit benefits for mental and nervous conditions and/ or drug and alcohol conditions to the first 2 years of disability. This limits the risk for subjective types of disability
2. Preexisting condition exclusions are common for smaller size groups. This addresses anti selection by the policy owner, who is typically also an ee of the company
3. other common exclusions are for disabilities from war, self-inflicted injury, or from commission of a felony

Question 29

Optional benefits - group long term disability

Answer 29

1. COLA - cost of living adjustment to provide inflation protection for benefits
2. survivor benefit - lump sum benefit payable to insure’d survivors upon death of the insured
3. expense reimbursement for day care expenses
4. pension benefit - an additional benefit payment to replace lost contributions to retirement plans
5. conversion option - allowing insureds who lose coverage to convert to either group or individual disability coverage
6. spousal benefits - disability protection for spouses of insured ees
7. catastrophic benefits - an additional amount for more serious type of disability, such as one resulting in total paralysis