Group Life Insurance

Group life insurance is most commonly associated with employers. Other common applicants for group life insurance include:

• Multiple Employer Trusts (METs)
• Labor Unions
• Creditors

Any group can apply for insurance, but the insurance must be incidental to the group. In other words, a group can’t be formed for the express purpose of obtaining group life insurance; its members must be associated for some other reason.

This doesn’t mean employers can’t band together to obtain a better deal on a group life insurance plan. In fact, this is quite common. Multiple Employer Trusts (METs) are groups of small employers from a common industry that join together to form a larger group, making the group more attractive to the insurer.

A distinguishing feature of group life insurance is that one policy is issued to cover multiple lives. The policy is issued to the employer or other authority, and that single authority is the policy owner. Each participant in the group plan receives a certificate, which serves as evidence of coverage. Anyone covered under a group life policy may assign their benefits and designate their beneficiary.

Another notable difference between group and individual insurance is the underwriting process. For an individual policy, underwriters examine the personal characteristics of every applicant. With most group insurance applications, that level of individual underwriting isn’t done unless the group is very small.

The factors that go into the underwriting process include the type of group, the nature of its business, its physical location, the size of the group, and the average age of the group’s members. No evidence of insurability or medical exams are required of any of the group’s members. However, group rates are based to some extent on the group’s past claims history (experience rating).

A group life policy is generally cancellable according to the terms of the contract. The employer may request to terminate the policy, typically with advance written notice (often 31 days) to both the insurer and employees. The insurer may cancel or nonrenew the policy at the end of a coverage period or anniversary date, subject to the policy terms and any applicable state laws.

To combat adverse selection, insurers use participation percentages. If the plan is non-contributory, meaning the employer pays the premium, 100% of eligible employees must participate in the plan. If the plan requires employee contributions (contributory), the required participation is 75%.

Employers may set eligibility requirements for group life coverage, such as minimum hours worked, length of service, or coverage classes (e.g., managers, executives, full-time employees). These rules must be applied uniformly to all employees within the class and must comply with applicable anti-discrimination laws.

Employers are free to switch insurance carriers for their group coverage or terminate coverage altogether. There are statutory rules that regulate the terms and conditions that must be followed when this occurs, including:

• The employees must be notified that the policy is being discontinued.
• All group policies must provide for an extension of benefits. The policy must clearly explain the terms of this right. The usual continuation period is 31 days.
• If a policy is discontinued, benefits must automatically be extended for disabled employees.
• When one insurer replaces another, the prior carrier is liable for all claims incurred during any extension periods. Also, the new carrier must cover all employees who were eligible to participate under the prior carrier. The new carrier must disregard any pre-existing conditions that would otherwise make a participant uninsurable.

Most group life policies include a conversion privilege. This allows members of the group to convert their coverage to an individual insurance policy for 31 days after leaving a group plan due to a qualifying event. The key value of this provision is that evidence of insurability isn’t required. This can be especially important for someone with health problems or pre-existing conditions at the time of the qualifying event. The individual policy must be permanent insurance and must be issued by the same carrier.

Lesson summary

Group life insurance is commonly associated with employers, but other entities like Multiple Employer Trusts, labor unions, and creditors can also apply for group life insurance, provided that the insurance is incidental to the group.

• Group life insurance involves issuing a single policy that covers multiple people. The employer (or another authority) is the policy owner, and each participant is given a certificate as evidence of coverage.
• Participants in a group plan can assign benefits and designate beneficiaries. Medical exams or evidence of insurability generally aren’t required for group members.
• Group rates are based partially on the group’s past claims history. The employer may terminate the policy (often with 31 days’ written notice), and the insurer may cancel or nonrenew at the end of a coverage period or anniversary date, subject to policy terms and state law.
• To prevent adverse selection, participation percentages are enforced: 100% participation for non-contributory plans and 75% for contributory plans.

There are statutory rules for termination or switching of insurance carriers, including employee notification, extension of benefits, and automatic extension of benefits for disabled employees.

• Most group life policies offer a conversion privilege that allows group members to convert coverage to an individual policy within 31 days of leaving the group due to a qualifying event, without requiring evidence of insurability.
• The individual policy must be issued by the same carrier and be permanent insurance, while disregarding pre-existing conditions that would otherwise make a participant uninsurable.

Chapter vocabulary