Group Insurance: Life and Disability Benefits

A. Characteristics of Group Insurance

Definition: an arrangement under which employer makes benefits payable to employees

Examples of benefits: medical, life, disability benefits

A. Group contract: the employer is the policyholder and employees are issued certificates

B. Group underwriting:

minimize adverse selection

reduce administrative costs

Factors used in group underwriting

insurance incidental

stability

persistency

determination of benefits

premium payments

administration

prior experience

size

composition

industry

geographic location

C. State Regulation

1. McCarran-Ferguson Act 2. Eligible groups

individual employer

trade associations

labor union groups

3. Contractual provisions

uniformity among states

common provisions

Federal Regulation

1. Age Discrimination in Employment Act Prohibits discrimination against workers

age >= 40 Applies to employers with >= 20

employees Group benefits, except for medical, can be

reduced for older employees

2. Civil Rights Act Applies to employers with 15 or more Requires pregnancy to be treated like any

other condition Pregnancy benefits excluded for dependents Abortions can be excluded unless life

threatening

3.Americans with Disabilities Act Applies to employers with 15 or more Disabled persons cannot be denied

employment Disabled persons must be provided the

same medical coverage as other employees Allows certain coverage limitations

II. Group Life Insurance: Term Coverage

A. Most common form is yearly renewable group term

B. Rates increase with age

Contract Provisions 1. Uniform 2. Variations due to states rules, company

practices and negotiations 3. Benefit schedules: benefits depend on

earnings and position 4. Eligibility requirements

Covered classification Full-time Actively at work Probationary periods Insurability Premium contributions Beneficiary designations

Settlement options Premiums Claims Grace period Misstatement of age Termination

Disabled employees Conversion within 31 days Accelerated benefits

Added Coverage 1. Supplemental life insurance 2. Accidental death and dismemberment

insurance

Federal Taxation Deductibility of premiums

Employer contributions are tax deductible as a business expense

Employee contributions are not tax deductible

Favorable tax treatment for plans that qualify under section 79

Taxation of proceeds

1. free of income taxation

2. includible in gross estate if incidence of ownership exists at time of death

Added coverage

1. Supplemental life insurance treated like additional group term

2. ADD

3. Dependent life insurance: contributions not taxable to employees

proceeds includible in dependent’s estate

B. LIFETIME COVERAGE

How to provide for postretirement coverage?

Current funding to continue term insurance

Group Universal Life Insurance Reasons for Growth

1. Success in individual market

2. Taxation of death benefits in excess of $50,000

3. Employer desire to contain costs

Advantages to employer

1. Little direct cost

2. No ERISA requirements

3. Less pressure to provide postretirement coverage

Advantages to employees

1. Opportunity for postretirement coverage

2. Flexibility in designing coverage

General Nature

1. Flexible premium

2. Charge made each month to purchase term coverage

3. Cash value = premiums + interest - mortality and expense charges

Features of GULP

1. Death benefits: Option A or Option B

2. Mortality charges: guaranteed for 3 years and group experience rated after 3 years

3. Expense charges: % of premiums + monthly flat charge

4. Interest rate

5. Premium adjustments: or

6. Loans and withdrawals are permitted

7. Dependent coverage is available

8. Accidental death and waiver of premium

9. Options at retirement or termination

10. Taxation

III. Group Disability Income Insurance

Purpose: to replace lost income as a result of sickness or accident.

Significance:

Risk of disability is greater than the risk of premature death

Impact is more severe than death

Types of Plans A. Short term B. Long-term C. Coordination between the two

A. Salary Continuation Plans Uninsured Eligibility: full time, satisfy a probationary

period Benefits: 100% of salary, duration: certain

number of days

B. Disability Insurance Eligibility: full time, actively at wok,

probationary period

1. Short term plans

2. Long-term plans

3. Elimination period: a. short-term plans

b. long-term plans

Definition of disability

1. Short-term plans

2. Long-term plans Benefits

1. Short-term plans: flat amount or a % of salary

2. Long-term plans: occupational and nono-ccupational disabilities, benefit amount a % of salary

Other contract provisions:

1. Claims

2. Payment of benefits

3. Rehabilitation

D. Federal Taxation 1. Employer contributions tax deductible 2. Employee contribution not tax deductible 3. Employer contributions are not

considered taxable income to employees 4. Benefits: fully contributory: not taxable

Noncontributory: taxable income

Group Long-Term Care Insurance

A. Reasons for coverage– Aging population– Increasing costs– Inadequate benefits under Medicare– Inability of families to provide care

B. Sources of long-term care– Personal savings– Public assistance– Life-care facilities– Riders in cash value policies– Individual LTC– Group policies

C. Effects of HIPAA– Favorable tax treatment to qualified long-term care

insurance

– Requirements for qualified policy» covers qualified long-term care services

» expenses covered under Medicare are not paid

» guaranteed renewable

» no cash value

» refunds of premiums and dividends must be applied to reduction in premiums

D. Group coverage– Eligibility requirements– Cost– Levels of care

» Skilled nursing care» Intermediate » Custodial care» Home health care» Adult day care

– Benefits» Inability to perform certain ADL

» Cognitive impairment

» Benefits limited to a specified $ amount

» Benefits may be indexed to inflation

» Duration 3 to 6 years

– Exclusions» care outside U.S

» Attempted suicide

» Alcohol and drug treatment