Group Life Insurance PDF

Chapter 6: Group Life Insurance Competency components Analyze the available products that meet the client’s needs. Competency sub-components Analyze the types of contracts that meet the client’s needs. Click here to return to Table of Contents...

Chapter 6: Group Life Insurance Competency components Analyze the available products that meet the client’s needs. Competency sub-components Analyze the types of contracts that meet the client’s needs. Click here to return to Table of Contents 85  Group Life Insurance Group insurance provides associated individuals with a variety of coverages, including prescription drug and dental benefits, vision care, disability benefits, and life insurance. This Chapter examines group life insurance. 6.1 How group life insurance works Group insurance in general is insurance coverage that a plan sponsor (often an employer) offers to a group of people who have a common association with the sponsor. 6.1.1 What constitutes a group People with at least one factor in common can be covered under a group insurance plan. Group life insurance may be offered to: Employees of a certain employer; Alumni of a college or university; Members of an occupational association (e.g. dentists); or Members of a business association (e.g., members of a chamber of commerce). EXAMPLE Todd is a graduate of the University of British Columbia and the University of Toronto Faculty of Law. He is also a member of the Canadian Bar Association and operates a one-person legal practice in Kamloops. He has the option of joining group insurance plans offered by his former universities or the Bar Association. Todd could join any one of these plans because he is a member of the “group” associated with each plan. 6.1.2 Policyholder The policyholder of a group life insurance plan is the entity that enters into a contract with an insurance company to provide group insurance coverage to the members of its group, such as employees or university alumni. The policyholder is called the “plan sponsor.” Click here to return to Table of Contents 86 6.1.3 Master contract A group life insurance plan is established under a master contract between the group plan sponsor and the life insurance company. There is no contract between the lives insured under the group plan and the insurance company. The group member does not get a copy of the master contract, nor do they have control over the contract beyond naming the beneficiary. The group member’s benefits and rights under the master contract are outlined in a benefit booklet, which is provided to each plan member. 6.1.4 Group membership A group plan member is a person who is insured under the group plan’s master contract. The plan member must meet the requirements that define the group. If the group life insurance plan is sponsored by an employer, new employees are usually allowed to become members of the group plan once they have completed the group’s “probationary period”. The probationary period is often three months of employment and is referred to as the waiting period. Though some employers automatically enroll employees in the group life insurance plan, others employers give employees the option of becoming a member. In this case, the employee usually has a period of time known as the “enrolment period” during which he can enroll in the group plan and obtain life insurance coverage without having to provide evidence of insurability. 6.1.4.1 Actively-at-work requirement With employer/employee group plans, the employee must be “actively at work” at the time his coverage under the group plan begins. If the employee is off work due to illness, injury, disability, or on vacation on the date that coverage is due to commence, the start of coverage will be delayed until he returns to work. 6.1.4.2 Membership classes Some employer/employee group plans may have more than one membership class under the plan, with different types and levels of coverage for each class. Click here to return to Table of Contents 87 EXAMPLE The Triangle Tool Company sponsors a group insurance plan for all of its employees. The plan provides generous dental benefits for its office workers, but no dental benefits for its factory workers. 6.1.5 Premiums The premiums for group life insurance are based on the makeup of the group as a whole, and not the underwriting characteristics of the individual plan member receiving coverage. For example, the life insurance company might charge $0.25 for every $1,000 of life insurance coverage. The rate will apply to each person in the group, regardless of that person’s age, gender, or smoking status. The insurance company may recalculate the premium rate annually, to reflect changes in the group’s demographics. For example, if the group’s makeup changes to include substantially younger females, premiums will likely be reduced for all of the group members. The employer usually covers at least 50% of the premiums, but some elect to cover the full premium amount. If the plan is contributory (i.e., if the employees are required to pay part of the premiums), the employer deducts the employees’ portion from their pay. 6.1.5.1 Tax treatment for the employer In an employer/employee group plan, premiums for group life insurance paid by the group sponsor (the employer) are a tax-deductible business expense. 6.1.5.2 Tax treatment for employee If an employer pays premiums for a group life insurance plan, the amount paid for those premiums is a taxable benefit for the employee whose life is insured under the plan. Group life premiums paid by the employee, by way of payroll deduction, are not deductible by either the employer or the employee. Click here to return to Table of Contents 88 EXAMPLE Ashok is a member of his employer’s group life insurance plan. The annual premiums for his participation in the plan amount to $400, and the employer pays 75% of these premiums, or $300. This results in a taxable benefit of $300 for Ashok, which will be reported as part of his annual income. The $100 balance of the premium is deducted from Ashok’s pay, to cover his share of the premiums, but this amount is not a tax-deductible expense. As with individual life insurance policies, death benefits paid out under a group life insurance plan are not taxable to the beneficiary 6.1.5.3 Sales tax on premiums Premiums paid under a group life insurance plan are subject to provincial insurance premium taxes. This can be any amount from 2% to 5% of the gross premium, depending upon which province the plan is located in. Life insurance premiums paid for group coverage may also subject to provincial retail sales tax. These taxes can range from 8% to 9%, again depending on the province. 6.2 Group term insurance coverage Participants in the group plan each receive a pre-set level of yearly renewable term life insurance coverage. Under some plans, members may also be able purchase additional coverage up to a limit at their own expense. 6.2.1 Schedule of benefits The base level of life insurance benefits available through a group insurance plan is set out in a schedule of benefits in the master contract. 6.2.1.1 Earnings multiple The most common formula is “earnings multiple”. The coverage is based on a multiple (e.g., two times) of the member’s base salary. The benefit is usually subject to an absolute maximum limit. Click here to return to Table of Contents 89 6.2.1.2 Flat rate Under a flat rate option, every group member receives the same amount of life insurance coverage, regardless of their salary. 6.2.1.3 Length of service Some group plans set up years ago were based on length of service with the employer. The plans were designed to reward long-serving employees. 6.2.1.4 Combination Some plans use a combination of the above methods. For example, the plan might use one method of calculating life insurance benefits for the salaried employees and a different method for hourly-rated employees. 6.2.2 Coverage maximums Most group life insurance plans place a dollar maximum on coverage for any one plan member. 6.2.3 Reductions for older or retired group members To keep costs reasonable for the whole group, the plan may provide for reduced coverage for older or retired members. The reduced coverage may be: A fixed percentage of pre-retirement coverage; A fixed dollar amount; A gradual decline in coverage each year until the specified minimum is reached. EXAMPLE Juan is a member of his employer’s group life insurance plan which provides a base benefit of $100,000 for all members. Juan will retire at the end of next month, when he is 65 years old. Upon retirement, his coverage will be reduced by 50% of the base coverage, to $50,000. At age 70 it will reduce to 25% of the base coverage, and at Juan’s age 75 the coverage will terminate. Click here to return to Table of Contents 90 6.2.4 Optional additional coverage Group plans require the plan members to take the basic life insurance coverage offered. In addition, some plans allow the members to customize their coverage by electing to take additional benefits. The plan member must usually qualify medically to receive the coverage because the additional benefits are optional. Otherwise, it would be those members who could not qualify for coverage, or who could not qualify at standard premium rates, that would be most likely to opt for the extra coverage. In some cases, the need to qualify medically may be waived if the optional coverage is elected shortly after the member became eligible for the basic coverage (within 60 days, for example). Plan members are usually required to pay 100% of the premiums for the optional coverage. 6.2.4.1 Term coverage Optional life insurance coverage for the plan member (and perhaps the plan member’s spouse) is usually in the form of term insurance. It is available in “units” of insurance ($25,000 per unit, for example) subject to an overall maximum amount of coverage, including both the basic and the optional coverage. EXAMPLE Adele is a recently widowed single mother with two children under the age of 10. Two years ago, she underwent chemotherapy for cancer. She was told that she would have to be cancer-free for five years before she could apply for life insurance. She just joined a corporation with group insurance benefits. The group plan offers basic term life insurance equal to the employee’s salary – $60,000 in Adele’s case. Plan members also have the option to elect units of additional coverage up to three times salary, without underwriting, provided they apply within 60 days of qualifying for the basic coverage. Adele automatically qualified after working for the company for three months. She chose to take additional group term coverage of $180,000, to protect her children financially should she die. Click here to return to Table of Contents 91 6.2.4.2 Permanent coverage In a few instances, the plan may permit some type of permanent life insurance to be purchased as optional coverage. 6.3 Dependant life coverage Most group life insurance plans allow their members to purchase term insurance coverage on the lives of their dependants. If taking the coverage is elected shortly after the member joins the plan (within 60 days, for example) no medical evidence of insurability of the dependants is required. 6.3.1 Definition of dependant Under group plans the definition of a “dependant” typically includes: A spouse or common law partner of the plan member, of either sex; Children of the plan member. This includes both biological and adopted children. The coverage of dependent children of the plan member typically ends when the child turns a certain age; 18 or 21 in most cases. Coverage may extend to as long as the child’s age 25 if the child is in full-time attendance in school. The premium for dependant coverage is usually a fixed amount, regardless of the number of dependants that the plan member has. EXAMPLE Lee and Albert joined the same company on the same day. Lee is married to Louisa and the couple has no children. Albert is a widower with three children under the age of 14. When Lee and Albert joined the company, they both enrolled in the group benefits plan and both chose to take the maximum amount of dependant’s life coverage. Despite the differences in their circumstances, Lee and Albert pay the same amount of premium for the dependants’ coverage. 6.3.2 Death benefit amount The dependant life coverage is usually a modest amount: in the $5,000 to $20,000 range on a spouse or common-law partner; and 50% of that amount for each dependent child. Click here to return to Table of Contents 92  6.3.3 Premiums Premiums for dependant lives coverage are typically very low, perhaps only a couple of dollars per month. The premiums are the same for all group members, regardless of the number of their dependants or the ages of those dependants. 6.4 Survivor income benefits Some group plans offer an optional monthly survivor income benefit, over and above the lump- sum death benefit. 6.4.1 Beneficiaries Survivor income benefits are normally payable to the plan member’s surviving spouse or common-law partner although the plan member’s children could be named as an alternate beneficiary. Survivor benefits are usually payable until a surviving spouse remarries, reaches age 65, or dies. The survivor’s benefit is usually a function of the plan member’s monthly salary at the time of his death, subject to a maximum cap. EXAMPLE Li’s group plan offers optional life insurance coverage, in the form of a monthly survivor’s benefit equal to 25% of his monthly salary. When he died, he was earning $6,000 a month. His widow received a monthly income benefit of $1,500, in addition to a lump-sum death benefit of $72,000. Click here to return to Table of Contents 93 6.5 Accidental death and dismemberment (AD&D) If a group plan offers accidental death and dismemberment coverage (AD & D) and the plan member dies as a consequence of an accident, on or off the job, an extra death benefit will be paid. The AD & D benefit is usually equal to the basic death benefit payable under the plan. EXAMPLE Augustus worked for a firm that had a group life insurance plan offering a basic death benefit equal to twice the member’s salary. The plan also has an AD & D benefit. Augustus, who earned $75,000 a year, was killed in a boating accident while on vacation. His wife received a death benefit of $300,000 under the group plan: $150,000 ($75,000 x 2 = $150,000) basic life insurance coverage plus $150,000 because Augustus’ death was accidental. If the plan offers an accidental dismemberment benefit, a lump sum will be paid for the loss of, or loss of use of, specified body parts or functions (like blindness) due to an accident. Again, the benefit payable is usually a percentage of the basic death benefit under the plan. 6.5.1 Basic vs. voluntary AD&D Some group plans also offer their members an option to buy AD & D coverage, rather than making the coverage a mandatory component of the basic plan. The coverage can be purchased in multiples of dollar amount units, up to a maximum. No medical evidence of insurability is required for voluntary coverage because benefits under the coverage are paid only in the event of a death or other loss due to an accident. Click here to return to Table of Contents 94 EXAMPLE Rena’s group plan provides a group term death benefit equal to her annual salary of $100,000. She elected to purchase four units of voluntary AD&D coverage, at $25,000 per unit. If she dies as a result of an accident, her beneficiaries will receive a total of $200,000, calculated as: ($100,000 + (4 × $25,000)) However, if she dies as a result of disease, her beneficiaries will receive only the basic insurance coverage of $100,000. 6.5.1.1 Coverage for dependants Some group plans permit members to buy AD & D coverage on dependants, as long as the plan member has AD & D coverage. Dependant coverage is subject to overall limits. 6.5.2 Exclusions Losses due to excluded activities or conditions will not give rise to AD & D benefits being paid. Excluded activities typically include: Self-inflicted injuries; Losses incurred due to war, declared or undeclared; Active service in the armed forces; Losses incurred during the commission of a crime by the insured; Driving a vehicle while impaired; Piloting a non-commercial aircraft. 6.6 Conversion privileges A plan member can often convert his coverage to an individual policy. The conversion is done with the same insurance company providing the group coverage and without medical underwriting, so long as the conversion takes place within a set time frame (often 30 days). Conversion can normally be affected if: He leaves the plan because he retires or changes employers; He is no longer a member of the sponsoring organization; The plan itself is terminated. Click here to return to Table of Contents 95 6.6.1 In Québec20 The Québec Act respecting insurance includes specific rules that protect a group member’s rights when he leaves a group life insurance plan, or when the master contract expires or is cancelled. 6.6.1.1 Leaving the plan 21 The Québec Act respecting insurance specifies that if a group life insurance plan member leaves the group prior to age 65, he must be given the option of converting some or all of his life insurance coverage into the same amount of individual insurance. This also applies to any spousal or dependant life insurance coverage that existed under the group plan. The amount of insurance on the participant's life that is eligible for conversion must be at least $10,000 and may not exceed $400,000. In addition, the amount of dependant life insurance that may be converted must be at least $5,000 for his spouse and for each dependant, without exceeding the amount of insurance on the life of those persons on the conversion date. The plan member must be allowed to exercise these conversion rights for at least 31 days after leaving the group, without providing evidence of insurability for himself, his spouse or dependants. The group insurance will remain in force during that 31-day period, or until it is converted into individual insurance. The member must be given the following options upon conversion: Coverage that is comparable to that provided by the group insurance contract as to the amount and the term; or Individual life insurance for one year, providing protection comparable to that provided under the group insurance contract, but convertible at the end of the year into permanent protection. 20 Sections 6.6.1, 6.6.1.1. and 6.6.1.2 are excerpts taken directly from the Life insurance, Life Licence Qualification Program (LLQP) Exam Preparation Manual, 5th Edition, 2018, Autorité des Marchés Financiers, pages 108 - 109. 21 Gouvernement du Québec. Regulation under the Act respecting insurance. [online]. Revised November 1, 2014. Click here to return to Table of Contents 96 6.6.2 In the rest of Canada Conversion rights are not governed by provincial laws in the provinces and territories outside of Quebec. However, the insurance industry does follow the guidelines set forth by the Canadian Life and Health Insurance Association13 (CLHIA): On or before reaching age 65, a plan member should be able to convert up to $200,000 of the group-life coverage on his own life to individual insurance without providing proof of insurability; A plan member should at least have the option of choosing yearly-renewable term, or term-to-age 65. The plan member must apply for the conversion within 31 days of the termination of his life insurance coverage under the group plan. The CLHIA guidelines make no reference to conversion privileges for coverage on the plan member’s spouse or other dependants. Many group insurance plans providing optional group life coverage on the member’s spouse extend the same conversion privileges to that coverage. 6.6.3 Premiums upon conversion With a converted policy based on group coverage, adverse selection applies; an insured who is uninsurable or who has a higher risk of dying than normal is more likely to convert his group coverage to individual coverage. The insurance company does not get to medically underwrite the insured as they normally would with a new applicant. This increases the insurance company’s risk, which naturally results in higher premiums. 6.7 Replacement contracts Employers look for ways to reduce the cost of employee benefits or to enhance those benefits without increasing costs. This means that they sometimes change group insurance providers and replace existing contracts with new ones, often ones issued by other insurance companies. The CLHIA guidelines are designed to ensure that a group life insurance plan member does not lose coverage solely because the plan sponsor has decided to change insurers, or because he was not actively at work at the time of the change. Click here to return to Table of Contents 97 However, if there were several classes of membership under the old plan (e.g., management, clerical and labour), and one of those classes is not covered by the replacement plan, then members of the old plan who fall into that class would not be entitled to coverage under the new plan. 6.7.1 Benefit amounts As long as the plan member is eligible for insurance under the terms of the replacement contract, he should be covered for the same amount under the replacement contract. 6.8 Disabled members Group life insurance policies typically include a waiver of premium provision, which stipulates that, if the member is disabled, the insurance company will waive the premiums for a specific period of time specified in the contract, while still providing coverage. CLHIA guidelines require that the premium must continue to be waived and coverage continued even if the employer terminates the group contract with the insurance company. 6.9 Group creditor insurance Institutions lenders, like banks, generally want the clients that borrow from them to life insure the loan. This is to ensure that the loan will be repaid if the borrower should die while a balance is still outstanding. Mortgages are the most common type of loan to require life insurance coverage. The lenders often offer group creditor insurance to their customers to cover the liability. Group creditor insurance is a form of group life insurance. The lending institution is both the policyholder and the beneficiary of the coverage. The Canadian Life and Health Insurance Association (CLHIA) has published guidelines to help protect the borrowers who purchase group creditor insurance. Click here to return to Table of Contents 98 The guidelines require the lender to disclose, among other issues: 22 That the insurance coverage is voluntary, and is not required for approval of the loan; That the borrower has at least 20 days after receiving the Certificate of Insurance to cancel the coverage and obtain a full refund; That the borrower has the right to cancel the coverage at any time; All terms and conditions that might limit, restrict or exclude coverage, such as, but not limited to, pre-existing conditions and the consequences of misrepresentation; The amount of the premium or how it is calculated; That the coverage is subject to acceptance by the insurer; Any further steps the borrower must take; The insurer’s obligation to notify the borrower if coverage is declined; The terms upon which coverage starts, if the application is accepted. 6.9.1 Death benefit The death benefit payable under group creditor insurance is limited to the outstanding balance of the debt that the insurance covers. 6.9.2 Beneficiary The beneficiary of group creditor insurance is the lending financial institution, which uses the life insurance proceeds to discharge the remaining balance of the debt. 6.9.3 Premiums Premiums for group creditor insurance are calculated based on the borrower’s age and smoking status and are usually factored into in the monthly mortgage payment. The premium for mortgage creditor insurance, for example, is a form of decreasing term insurance. The premium remains level for the life of the mortgage as the balance reduces. 22 Canadian Life and Health Insurance association. Guideline 7 - Creditor’s group insurance. [Consulted September 21, 2017]. http://www.clhia.ca/domino/html/clhia/CLHIA_LP4W_LND_Webstation.nsf/resources/Guidelines/$file/Guideline Click here to return to Table of Contents 99 6.9.4 Additional coverage Some group creditor life insurance plans offer coverage if the borrower suffers any of the following: 6.9.4.1 Disability Group creditor disability insurance pays a benefit to the lending institution if the borrower becomes disabled and unable to work. The amount will be the lesser of the monthly loan payment or a specified maximum. Benefits may continue as long as the borrower remains disabled, or for a limited period of time. A cumulative maximum may also apply. 6.9.4.2 Critical illness The plan will pay off the outstanding debt if the borrower is diagnosed with a covered condition or illness. 6.9.4.3 Unemployment Group creditor unemployment insurance will pay a monthly benefit to the lending institution if the borrower becomes unemployed through no fault of his own. Benefits are restricted, such that they will pay a maximum dollar amount for a limited period of time. Click here to return to Table of Contents 100 6.10 Group life insurance vs. individual life insurance TABLE 6.1 23 Group life insurance vs. individual life insurance GROUP LIFE INSURANCE INDIVIDUAL LIFE INSURANCE CONTROL OF POLICY The employer or plan sponsor owns and The policyholder owns and controls the policy. controls the policy. EVIDENCE OF INSURABILITY Generally no evidence of insurability is Evidence of insurability is required. required during the enrolment period. PREMIUMS Premiums are based on the makeup of the Premiums are based on the health of the group. individual. POOR HEALTH STATUS People in poor health can get People in poor health will be denied coverage, or coverage at affordable rates. will have to pay higher premiums. GUARANTEED PREMIUMS Premiums are only guaranteed for one The policyholder can choose yearly-renewal-term year at a time. coverage, 5-year term, 20-year term, etc., where rates are guaranteed for the term. COVERAGE Coverage rarely continues past age 65. Can obtain term coverage to age 75 or 80, or permanent coverage until death. Base coverage amounts are dictated by Coverage can be customized to the individual the plan, and optional coverage is usually needs. limited. 23 Life insurance, Life Licence Qualification Program (LLQP) Exam Preparation Manual, 5th Edition, 2018, Autorité des Marchés Financiers, page 113. Click here to return to Table of Contents 101 6.11 Advantages and disadvantages of group life insurance TABLE 6.2 24 Advantages and disadvantages of group life insurance ADVANTAGES DISADVANTAGES No evidence of insurability is required. People in very good health will pay the same Individuals who are in poor health, have a premiums as the rest of the group. pre- existing condition or who smoke will The employer or plan sponsor controls the plan still be covered, with affordable premiums. and can make changes without consulting the Some or all of the premiums may be group members. paid by the employer. The amount of coverage may not be what the It is convenient for the employee. plan member needs. Coverage may be converted to The premiums for individual coverage upon individual coverage without proof of conversion are not guaranteed and may not be insurability if the policy terminates or favourable. the member leaves the plan. Employer-paid premiums are a taxable benefit. 24 Life insurance, Life Licence Qualification Program (LLQP) Exam Preparation Manual, 5th Edition, 2018, Autorité des Marchés Financiers, page 114. Click here to return to Table of Contents 102