Understanding Group Life Insurance

Group insurance is defined as insurance coverage for a number of people under a single master contract or master policy. there are many differences between group and individual policies, even though the overall purpose of the two is the same: prevention from financial loss.

The most common type of group insurance is provided by an employer, who is presented a master contract by the insurer, and all eligible employees receive a certificate of insurance. This certificate summarizes the coverage provided as well as certain rights within the policy.

The National Association of Insurance Commissioners, known as NAIC, has developed basic group insurance guidelines and though not a regulatory entity, most states follow these basic guidelines.

The guidelines include:
- not requiring an individual medical exam,
- the business is the insurance policy owner and the employees are issued certificates of insurance under the master policy,
- insurance coverage is established for the benefit of the employees and their dependents, not for the benefit of the company,
- insurance premium rates are based on the group, not the individual, and
- employee benefit levels are based on tenure, and cannot be based on age, race, gender, or other non-tenure factors.

There are two types of group plans: contributory plans and non-contributory plans. In a contributory plan, premiums are jointly paid by the employer and participating employees, and at least 75% of all eligible employees must be covered. In a non-contributory plan, premiums are paid entirely by the employer and must cover 100% of all eligible employees.

As the master policyowner, the employer is the insured and the contract is between the employer and the insurance company. When employees join the group insurance, they are entering into a contract with the employer, not the insurance company, so they are given certificates of insurance between the employer, who they are contracted under, and the insurance company, with whom the employer is contracted.

The certificate states a few important points including the amount of coverage and the named beneficiary. Details should be reviewed with the insurance license agent, it explains the specific benefits under the plan such as the effective date, age limits, notice of claim, proof of loss, and the right to convert to individual coverage if the group coverage is terminated.

There are generally five types of group life insurance including:
Group term insurance, which is also known as annual renewable term (ART), is the most common type of group insurance and is generally renewable without proof of insurability. Group whole life insurance is used mainly to fund retirement plans such as employee pensions. Group creditor life insurance is considered a term group life insurance and is used to pay creditors the amount loaned to a debtor (insured) in the event death occurs and the loan is not fully paid back. Group paid-up life insurance involves a combination of both term and whole life policies where the employer pays for the term portion and the employee pays the whole life portion. Contributions are not taxable income to the employee and are tax-deductible business expenses for the employer. In the event of termination or retirement, the employee is granted the paid-up portion, or cash value of the policy. Group survivor income insurance is similar to individual joint life survivor income insurance. Survivorship policies are purchased to help the surviving children pay estate taxes after the death of the second parent

Group insurance is also written to include an employee’s dependents. Dependency is defined by the relationship to the insured and the dependency of the insured. Typically, this includes the spouse, children, dependent parents, and anyone else whom dependency can be proven. A child is dependent usually up to age 18 or 21 (full-time student), or longer if they are dependent due to permanent disability (mentally or physically).

Upon termination or retirement from a company, an individual has the right to convert his or her group life policy to an individual whole life policy without showing proof of insurability. Employees must convert their group whole life coverage within 1 month (30 or 31 days) after termination or forfeit their conversion option.