Group Life Insurance

Finding quality employees is only part of the challenge of running a successful business. Maintaining a well motivated staff is probably a more difficult challenge. In today's labor market the quality of benefits offered by the employer is a substantial consideration of both prospective and current employees. They are also interested in retirement and security for their families and often times they look at the size of the benefit in contrast to their out-of-pocket costs.

There are many plans to choose from and there is no right or wrong answer in selecting a program for your company. You have to think about how you would like to fund the plan, how much you and your employees want to contribute, and how much you want to contribute for your employees, if any. You have options. You can look at pure term life insurance which is fairly cheap and provides substantial amounts of insurance or you can look at a whole life program which provides cash value for retirement purposes.

Just less than half of all life insurance in force in the United States is group life insurance and the amount of coverage is in the trillions of dollars. Many people rely on group insurance as their primary insurance coverage.

In group life insurance a single contract is issued for a number of people. In fact, each individual may not even be named in the insurance contract. The employer will receive the master policy and the employees will receive a Certificate of Insurance which summarizes the coverage terms and explains the employee's rights under the contract.

The employer is the applicant for the insurance plan and generally provides the insurance for its employees as a benefit. The employer selects the type of coverage and determines the amount of coverage for each employee. The plan can be a "non-contributory plan" which is funded entirely by the employer or a "contributory plan" paid in-part by the employee.

The group must meet the underwriting requirements which rely on the experience of the group as opposed to mortality or morbidity tables.

Generally, a group plan has a lower cost than individual insurance plans because the administrative, operations and selling costs are much less to the insurance company. The employer either pays the premiums, if the plan is non-contributory, or collects the funds through pay-roll deductions and advances the funds to the insurance company if the plan is a contributory plan.

As long as the "group" was not formed for the purpose of obtaining insurance, almost any kind of group qualifies for group coverage. For example, labor unions, trade associations, fraternal organizations, creditor-debtor groups, and single-employer groups can be issued group coverage although some states restricts the groups to a minimum number of participants. Normally, at least 10 people must be enrolled; however, this number may be more or less in different states.

As noted above, plans can be contributory or non-contributory. Where the employer pays the premiums for all employees (the non-contributory plan) it is assumed all employees will participate. If the employee contributes to the premiums (the contributory plan), some employees may not wish to participate because they do not feel they can afford the smaller paycheck or because they have coverage elsewhere.

In order to avoid burdensome and potentially unnecessary administrative costs for employees who may only be employed a short time, it is normal to have a probationary period of one to six months before the employee is eligible to participate. After the probationary period, a set enrollment window is provided for the employee to participate. An employee who fails to sign-up during the enrollment period may be required to provide evidence of insurability if they should decide to enroll at a later time. Other normal requirements for employees to qualify are that they must be full time employees and, if contributory, they must authorize the employer to deduct their share of the premium payment from their paycheck (i.e. payroll deduction).

There are basically two types of insurance plans for group life insurance programs:

• Term Life Insurance – an annual renewable term (ART) policy is the most common plan and provides the lowest cost life insurance coverage. Participants do not have to provide evidence of insurability each renewal period. The low costs results from the fact the insurer has the right to increase premiums each year based on the group’s experience during the previous year. The policyholder also has the right to renew coverage each policy year.

• Permanent Life (whole life) Insurance – there are several variations of the permanent life insurance option:

  • Group Ordinary Plan – normally, if the employees contribute to the plan they are allowed to own the cash portion. However, it may be set-up that if an employee terminates employment, the cash value will be forfeited and used to help fund the plan for the remaining employees.

  • Group Paid-Up Plans – these plans are a combination of term life insurance, paid by the employer, and whole-life insurance, paid by the employee. The death benefit is a total of the two plans. At retirement or termination the employee is entitled to the cash value (paid-up) policy.

  • Group Universal Life Plans – these plans offer a greater degree of flexibility than is usually found in other group life plans. The employee pays most of the premium payments; however, they are given certain latitude in selecting the amount of insurance and the premium amount to be paid.

There are several methods of determining how much insurance each employee can obtain through the group plan.

• Flat benefits – usually when the employer wishes to provide a small amount of insurance to the employees in order to maintain a minimum contribution they will provide the same benefits to all employees regardless of seniority, earnings, or position in the company.

• Earnings – another way to determine the amount of insurance for each employee is a method based on their earnings. For example, the plan may provide coverage calculated as a percent of earnings (2.5 times annual salary).

• Position – the position within the company may also be used to provide different levels of insurance. For example, laborers or operators may be allowed to participate in a $30,000 policy, managers in a $60,000 policy and vice-presidents in a $100,000 policy.

Once the plan becomes effective and the employee is enrolled in the plan, the employee remains qualified until the employee leaves the plan or the plan is terminated. The plan must allow a conversion privilege to a terminated employee which allows them to convert their enrollment from a group plan to an individual plan without providing new evidence of insurability. There is a 31 day window for the employee to determine if they wish to exercise the conversion period. If the terminated employee dies within that 31 day window, the benefits would be paid to the beneficiaries even though cost of the 31 day conversion window is not paid by the employee. Many group policies require the terminated individual to enroll in a whole life policy.

Other forms of group life insurance include:

• Franchise Life Insurance – used where participants are employees of a common employer (i.e., the employer may operate several companies) or are members of a common association or society. The employer/association/society is a sponsor of the plan and may or may not contribute to the premium payments. Unlike the employer’s group plan, each individual will be issued an individual policy which will remain in force as long as premiums are paid and the employee/member maintains their relationship with the sponsor. These are used by small groups who individually do not meet the state’s minimum numbers laws.

• Credit-Life Insurance – these are set-up by banks, finance companies, etc., to provide that if the insured dies before a loan is repaid, the policy benefits will be used to settle the loan balance. The premiums are usually paid by the insured as a means of collateralizing the loan.

• Blanket Life Insurance – used to cover a group of individuals exposed to a common hazard. For example, an airline may use this type of insurance to cover the passengers on a commercial flight. The insured are automatically covered and need not apply for the coverage and are not issued any sort of policy or certificate of coverage. At the termination of the hazardous event, the coverage is terminated. Schools, sports teams, volunteer fire departments, etc., are other examples of groups which may obtain coverage for personnel while engaged in named activities.

• Multiple Employer Trusts (MET) – the employer must become a member by subscribing to the trust and is issued a joinder agreement which spells out the relationship between the trust and the employer and the coverages to which the employer has subscribed. Used for employers who have a small group of employees and may not meet the state’s minimum numbers laws. Each employee is provided a certificate of insurance.

Any agreements and insurance policies within a business must be integrated with the overall plan and objectives of the business. Careful consideration must be given to the selection of the plan which is right for your business and to the method of funding your plan.

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This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contract your insurance agent. Our articles are intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.