Group Life Insurance
In this section we elaborate on life insurance offered as group coverage by employers:
Life insurance plans typically offered by employers
Benefit determination in group life
Supplementary types of group life insurance coverage
When employer obligations are terminated
Tax implications of group life insurance
Group life insurance is the oldest of the employer-sponsored group insurance benefits, dating from 1912. The most common type of group life insurance offered by employers is yearly renewable term coverage.
It is the least expensive form of protection the employer can provide for employees during their working years. Due to a shorter average life expectancy, older employees and males have relatively higher premium rates. The premium for the entire group is the sum of the appropriate age- or sex-based premium for each member of the group.
Obviously, a particular employee’s premium will increase yearly with age. However, if younger employees continue to be hired, the lower premium for new hires can offset increases due to aging employees hired some years earlier.
Also, if young employees replace older ones, premiums will tend to stabilize or decrease. This flow of covered lives helps maintain a fairly stable average total premium for the employer group.
Most group term life insurance provides death benefit amounts equal to the employee’s annual salary, one and one-half times the salary, or twice the salary.
Additional amounts of term life insurance may be available on a supplemental basis. Employers sponsor the supplemental plan, and employees usually pay the entire premium through payroll deductions. This allows employees to increase life insurance based on their individual needs.
Supplemental coverages are usually subject to insurability evidence to avoid adverse selection. Accidental death and dismemberment insurance is also part of added benefits. This coverage provides an additional principal sum paid for accidental death. The death must occur within ninety days of the accident. The coverage also comes in multipliers of salary.
The dismemberment part of the coverage is for loss of limb or eyesight. Dependent life insurance is available for low amounts for burial and funeral expenses. Benefits are minimal for children and spouses. Most employers also add waiver of premiums so that, in the event the employee becomes disabled, premiums are waived.
Added benefits are also called voluntary coverage because the employee always pays for the coverage.
Some provide three or four times the salary, but some states and many insurers set limits on maximum benefits. Some provide a flat amount, such as $10,000 or $50,000. Other employers base the amount on the position of the employee, but they have to be careful to adhere to nondiscrimination laws.
An amount equal to some multiplier of the salary is most common and reduces the possibilities of discrimination. Insurers’ underwriting limitations are usually related to the total volume of insurance on the group.
Life insurance policies have changed to meet the changing needs of policyholders. Many life insurance policies today allow benefits to be paid early in the event that the insured has a terminal illness or must pay catastrophic medical expenses.
Because living benefits may not provide enough funds to the terminally ill person, some may prefer to sell their policy to a viatical settlement company or to a life settlement program, which gives more funds up front, up to 80 percent of the face amount.
Many group plans terminate an employee’s group life insurance benefit when he or she retires. Those that allow employees to maintain coverage after retirement usually reduce substantially the amount of insurance available. If an employee is insurable at retirement, additional life insurance may be purchased on an individual basis.
The insured must provide evidence that life expectancy is less than six months or one year or provide proof of catastrophic illness such as cancer or liver failure. The insured can then receive living benefits or accelerated death benefits rather than the traditional death benefit.
Living benefits are limited in amount, typically from 25 to 50 percent of the face amount of the life insurance policy. The balance of the benefit (minus insurer expenses) is paid to beneficiaries after the death of the insured. Generally, adding the living benefits rider does not increase total group costs, and employers and employees do not pay more for the option.
Group Universal Life Insurance
Group universal life insurance is available from many employers.
This insurance is usually offered as a supplement to a separate program of group term benefits. Universal life premiums are paid by employees and are administered through payroll deduction. A substantial amount of coverage (e.g., twice the annual salary, up to a maximum of $100,000 in face amount) is available without evidence of insurability.
Low administrative expenses and low agents’ commissions usually result in reasonably priced insurance. Group universal life insurance plans have become increasingly popular with both employers and employees.
Employers are able to sponsor a life insurance plan that covers workers during their active years and into retirement at little or no cost to the employer. For example, the employer’s expense may be limited to the costs of providing explanatory material to new employees, making payroll deductions of premiums, and sending a monthly check for total premiums to the insurer. Group universal life insurance is also popular with employees, largely because of the flexibility of the product.
Case Study 08 - Do Viatical and Life Settlements Have a Place in Today’s Market?
Please download and study the case study entitled “Do Viatical and Life Settlements Have a Place in Today’s Market?” from the module resources section for this module.
The case study discusses the sale of life insurance policies by a terminally ill person to a third party.
In this section you studied important aspects of group life insurance offered through employers:
Yearly renewable term coverage is offered most often by employers to employees; group premium rates are based on the sum of the age- and sex- based premium for each member.
Benefits are based on employee’s salary or position, up to state and insurer maximums allowed.
Supplemental coverage, subject to individual evidence of insurability, may be offered; accidental death/dismemberment, waiver of premium in event of disability, and dependent life insurance are typical forms.
Employees select beneficiaries; beneficiaries choose settlement options.
Living benefits riders are allowed and do not generally increase group costs.
Group life typically ends when the employee retires, but the policy is convertible.
Group premiums are tax-free for up to $50,000 of the benefit.
Group universal life insurance may be offered as a supplemental program and is popular because of its affordability and flexibility.
1. How is yearly renewable term life insurance made more affordable under a group arrangement?
2. On which factors is the underwriting and pricing of group life based?
3. How are age mistakes made by employers in group life coverage corrected? How does this differ from policies offered on an individual basis?
4. What options for continuing coverage does a retiree covered under a group life policy have?
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