Group Life Insurance: Term Coverage

1
Chapter 6

• Group Life Insurance Term Coverage

2
Introduction

• Most common form is yearly renewable group term
• Rates increase with age, but flow of employees
  through group keeps premiums level

3
Contract Provisions

• Quite uniform as a result of NAIC Group Life
  Insurance Standard Provisions Model Bill
• Reasons for variations
• State rules
• Company practices
• Policyholder negotiations

4
Benefit schedules

• Purpose
• To classify employees eligible for coverage
• To specify amount of coverage provided to each
  covered person
• Earnings schedules
• Benefit is a function of earnings
• May be expressed as a percentage of earnings or
  on the basis of earnings brackets
• Position schedules
• Benefit is a function of position
• May lead to discrimination

5
Table 6.1
6
Table 6.2
7
Benefit schedules (cont.)

• Flat-benefit schedules the same benefit for
  everyone
• Combination, with which an employer may use more
  than one schedule for example, one for salaried
  employees another for hourly employees
• Reduction in benefits
• Usually as a result of age
• Types
• Reduce to flat amount
• Reduce by a percentage
• Gradual reduction over time

8
Eligibility requirements

• Covered classification
• Employee must fall into a classification
• Employer is responsible for determining
  appropriate classification
• Full time
• Usually the normal work week, which must be at
  least 30 hours
• Part-time employees might be covered, but often
  with more restrictive rules
• Actively at work
• New employees not covered until actual work
  commences
• Often waived when coverage transferred

9
Eligibility requirements (cont.)

• Probationary periods
• Rarely more than 6 months
• Coverage starts after probationary period ends
• Insurability
• Not usually required
• Most common when coverage previously rejected by
  employee
• No coverage until insurer decides that evidence
  of insurability is satisfactory
• Premium contribution
• Employee must authorize payroll deduction
• Failure to authorize can jeopardize start of
  coverage

10
Beneficiary designation

• Generally determined by insured persons
• Cannot be employer in some states
• Can be revocable or irrevocable
• If no beneficiary, death benefits payable to
  estate or under successive beneficiary provision

11
Settlement options

• Benefits payable in lump sum unless optional mode
  of settlement selected
• Employee can elect option if none selected,
  choice goes to beneficiary
• Available options are usually those customarily
  offered by insurer
• lump sum
• Interest
• fixed period installments
• fixed amount installments
• life income

12
Premiums

• Employer is responsible to get all premiums to
  insurer
• Most states require employers to pay a portion of
  group term coverage
• Payable in advance to insurer
• Usually payable monthly
• Dividends belong to employer

13
Claims

• Payable when insurer receives proof of death
• Brief claim form required from policyholder and
  beneficiary

14
Assignment

• Valid as long as state law and contract permit it
• Must be in writing
• Most often used to remove proceeds from estate

15
Grace period

• Usually 30 or 31 days
• Coverage in force during grace period even if no
  premium ever received by insurer

16
Entire contract

• Makes policy plus application the entire contract
• Prohibits agent from waiving or amending contract
• Incontestability of little concern unless
  evidence of insurability required
• Misstatement of age results in premium not
  benefit adjustment

17
Termination

• Master contract
• For nonpayment of premium
• For condition specified in contract
• By insurer at any premium due date with 31 days
  advance notice
• By policyholder with 31 days advance notice
• Employee
• Termination of employment
• No longer eligible
• Master contract terminated

18
Temporary interruptions of employment

• Permissible if allowed by employer on a basis
  that precludes individual selection
• Employer responsible for premium payment
• Usually time limit, such as 3 months

19
Disabled employee

• Coverage usually continues under
  waiver-of-premium provision
• Requires total disability
• Must be disabled before some age, such as 60
• Disabled employees sometimes treated like active
  employees with periodic premium payable

20
Conversion

• Employee can convert to individual coverage
• Conversion must be applied for within 31 days
  after termination of coverage
• Conversion is to any type of life insurance
  except term
• Rates based on current age and policy chosen
• A few insurers allow portability of group coverage

21
Accelerated benefits

• A portion of death benefit can be received prior
  to death if certain circumstances exist
• Terminal illness (generally the only acceptable
  reason for most group insurers)
• Catastrophic illness
• Incurring of nursing home and possibly other
  long-term care expenses

22
Accelerated benefits (cont.)

• Benefit may vary from 25 percent to 100 percent
  of coverage and be limited to specified dollar
  maximum (e.g., 25,000 or 100,000)
• No limitations on use of benefit
• Methods of financing
• Premium
• Interest on accelerated benefit
• Transactions charge when benefits taken

23
Added Coverages

• Supplemental life insurance
• Paid for by employee
• May be part of basic plan or separate contract
• May be set amount or employee may have choice of
  amount within limits
• Underwriting more stringent than basic coverage

24
Table 6.3
25
Table 6.4
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Accidental death and dismemberment insurance

• Traditional coverage
• Coverage automatic for those with group life
  insurance coverage
• Additional principle sum paid for accidental
  death
• Death must occur within 90 days of accident
• Schedule of benefits for dismemberment
• A multiple of principle sum often paid if death
  results during business travel
• Death benefits payable to beneficiary of life
  coverage dismemberment benefits payable to
  employee
• Usually no conversion privilege even if basic
  life coverage convertible

27
Table 6.5
28
Table 6.6
29
Voluntary coverage

• Employee elects and pays premium
• Employee can elect amount of coverage
• Common accident provision may reduce benefit

30
Dependent life insurance

• Main purpose is to provide funds for burial and
  funeral expenses
• Employee is beneficiary
• All eligible dependents are covered no choice
  allowed
• Benefits are small more than 2,000 results in
  income taxation if paid by employer
• Premium is a function of the employees age or a
  flat amount for all employees

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Table 6.7
32
Table 6.8
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Federal Tax Treatment

• Deductibility of premiums
• Employer contributions generally deductible by
  employer as an ordinary and necessary business
  expense unless
• Compensation unreasonable
• Employee is sole proprietor or partner
• Employee is stockholder who provides no
  substantive services to employer
• Employer is named as beneficiary
• Employee contributions not deductible

34
Income tax liability of employees

• Favorable tax treatment as long as group plan
  qualifies under Sec. 79
• General rules
• The value of the first 50,000 of coverage is tax
  free
• The value of coverage in excess of 50,000 is
  taxable based on Table I costs
• Nondiscrimination
• Key employees lose 50,000 exclusion if a plan is
  discriminatory
• Special nondiscrimination rules apply to small
  groups

35
Table 6.9
36
Taxation of proceeds

• Generally free of income taxation
• Proceeds includible in an employees gross estate
  as long as incidents of ownership possessed at
  time of death

37
Added coverages

• Supplemental life insurance treated like
  additional group term insurance
• Accidental death and dismemberment insurance
• Premiums treated as if they were for health
  insurance
• Dismemberment benefits are tax free
• Death benefits treated like group term life
  insurance
• Dependent life insurance
• Contribution not taxable to employees if coverage
  de minimis (2,000 or less)
• Death benefits in dependents estate

38
State Taxation

• Employee contribution usually tax free regardless
  of coverage amounts
• Death proceeds from life insurance often receive
  favorable treatment