Group Life Insurance
With societal and economic transformations, the growth of large cities and the evolution of unions in the United States, the development of group insurance has burgeoned. The influence and political strength of unionized workers have compelled employers to offer group insurance as an employee benefit, typically written as one-year term insurance. The legal requirements of group insurance are consistent throughout the majority of states and include the following basic characteristics:
- All states define a true group as having at least ten people covered under one master contract; however, some states allow even smaller groups.
- Coverage is generally available without evidence of insurability; that is, without the need for individual medical examinations.
- The master policy is issued to the employer, trust, union, or other association, with Certificates of Insurance being issued to the individual insured employees or members.
- The insurance may not be obtained to benefit the employer, trust, union, or other association; it must be for the benefit of the covered employee or member, and his or her dependents.
- Premiums are based on the experience of the group as a whole. It may be paid entirely by the policyowner (employer, trust, etc.), or it may be paid jointly by the policyowner and the insured. If the premium is paid entirely by the policyowner it's known as a noncontributory plan, and all eligible employees or members must be covered. If the premium is paid by both the policyowner and insureds, the policy is classified as a contributory plan, and at least 75 percent of all eligible employees or members must be covered. The term 'eligible employees' refers to an eligible class of employees, such as full-time employees, salaried workers (as opposed to workers paid on an hourly basis), non-union workers, etc. Certain groups of employees may be excluded from the eligible class as long as the exclusions are based on some particular occupational criteria. The policyholder is always required to pay at least some portion of the premium. Insureds, on the other hand, are by law not permitted to contribute more than a specified amount.
- Individuals covered under the plan are classified in such a way (typically by salary, position, or length of employment) that they cannot choose the benefit levels.
Furthermore, group policies have special provisions that are unique to the category of 'group insurance,' though some are along the same lines as their counterparts found in policies for individual insurance. Basically, group policies must contain provisions pertaining to:
- A grace period – usually 30 or 31 days;
- Incontestability – typically one or two years after the policy becomes effective, and/or usually two years from the insured's effective date of coverage;
- The entire contract – the application must be attached to and made a part of the contract;
- Representations – statements made regarding an applicant's health are viewed as representations and not warranties;
- Evidence of insurability – individual insurability must be proven if the employee or member joins the plan after the normal enrollment period;
- Misstatement of age – the insured's premium is adjusted to the correct age; typically under individual insurance benefits are adjusted;
- Facility of payment – this allows payment of policy proceeds to be made to a close relative or friend if no beneficiary is named or still alive;
- Conversion – the right to convert to an individual policy when the insured's coverage under the group policy ends due to termination of employment, the elimination of a class of insureds or termination of the master policy itself; and
- Certificates of Insurance – issued to individual insureds as evidence of coverage under the master policy.
The Certificate of Insurance is a form the employee or member receives which acts as proof of insurance, stating the coverage amount, the benefits under the plan and the beneficiary's name. This is because with group insurance, the master policy is evidence of a contract only between the insurer and the employer, association, etc. (i.e., the sponsor, or policyowner). Of course, the policy is purchased for the benefit of the individuals that are to be covered under the policy, but it's actually issued to the sponsor. The individual insureds do not receive a copy of the policy, since there is technically no agreement between them and the insurer. As the master policyowner, the sponsor retains the life insurance policy itself.
In addition, to the certifying the amount of protection and any designated beneficiaries, the certificate provides enough additional information so that the insured is aware of the benefits available to him or her under the plan, as well as their rights and obligations. The face page of the document typically outlines the coverage effective dates, dependent coverage and benefit amounts. The certificate also includes information regarding benefit descriptions, age limits, notices of claim and the insured's right to convert to individual coverage in the event of policy or employment termination.
Types of group coverage
Generally, there are four main types of group life insurance being marketed to eligible groups: group term life, group whole life, group credit life and group survivor income benefit insurance. In most cases, it's also possible to extend coverage to include the dependents of employees or members that are insured under a group life plan. Eligible dependents may be the insured's spouse, children, parents or any other person for whom dependency upon the insured can be proven.
The insured's children can be stepchildren, adopted children or foster children. They must be under a specified age, usually age 19 (or a few years older if attending school full-time). However, a child may be retained as a dependent beyond those ages if he or she is permanently mentally- or physically disabled prior to the specified age. The law further states that any other person who is legally dependent upon the insured is also eligible for coverage. Dependency is proven by the relationship to the insured, residency in the home, or the person being listed on the insured's income tax return as a dependent. Dependent coverage is not provided under credit life insurance.
Group conversion optionOne disadvantage of group life insurance is that it's usually only temporary coverage, and an individual insured may lose the coverage when he or she leaves the group or is no longer eligible. To lessen this drawback, group term policies must include provisions to allow for conversion of the member's coverage to individual insurance. They may also include continuation-of-insurance- and waiver-of-premium provisions. Some employers offer to continue group term insurance at reduced amounts for their retired workers.
By law (in most states), any employee covered by a group life insurance plan must be allowed to convert the coverage – upon leaving the eligible group or termination of employment – to an individual permanent life insurance policy without evidence of insurability. When converting, however, the departing employee must select a form of insurance other than term. In other words, the employee must choose a whole life policy. The employee must also apply for the conversion within a specified period of time after leaving the group – usually one month – or the conversion privilege is forfeited. Coverage is automatically in force during this time, and is often limited to no more than $10,000 or the amount of coverage under the group policy, whichever is less.
This conversion privilege may also be used if, for any reason, the employer or organization discontinues group coverage. The same rules apply, except that application must be made within one month of the policy's cancellation rather than a month following the employee's termination date.
FEGLI and SGLI Federal Employees' Group Life Insurance (FEGLI) provides automatic group life insurance for federal employees unless they choose not to be included in the plan. Life insurance in the amount of one year's salary is customarily provided. Another one year's salary may be added but is contributory; i.e., the employee must pay a portion of that premium. Servicemember's Group Life Insurance (SGLI) is automatically provided for members of the armed forces. The life insurance is provided on a group term-life basis as soon as a member enters active duty. The maximum insurance amount is currently $400,000, with automatic full-time coverage applicable to qualified reservists, as well. Premiums are deducted from the servicemember's paycheck. Both SGLI and FEGLI are underwritten by private insurers in very large group life insurance contracts.
