Group Life Insurance
The are four types of Group Life Insurance benefits available:
- Employee Basic Life
- Employee Optional Life
- Dependent Basic Life
- Dependent Optional Life
Basic life insurance is discussed below. Dependent and Optional Life are described in a separate section.
Basic life insurance pays a pre-specified amount (as defined in the contract) in the event of the death of an employee from any cause. The rates are revised annually (yearly renewable term) and are based on the demographics of the group. Premiums paid by the employer on behalf of the employee are a taxable benefit, however, benefits received are non-taxable. Beneficiaries should be designated on the group certificate. If possible, the estate of an individual should not be named as beneficiary because the proceeds then become subject to probate.
A description of the main features of a basic group life plan follows.
The amount of coverage is generally based on either the employee's earnings or a flat amount. Earnings for the purpose of group life insurance coverage typically only include salary. However, it is possible to include commission income and sometimes bonuses. An earnings based benefit schedule will pay a benefit based on a multiple of earnings (e.g. 1 x salary, 2 x salary, etc.). A flat benefit schedule does not pay a benefit related to earnings, rather all members of a class have the same level of coverage, typically ranging from $25,000 to $500,000 (as pre-determined by the plan sponsor). It is common to have different benefit schedules for different classes. For example, an "executive" class could have a benefit schedule of 2 x salary whereas another class made up of "all other employees" could have a flat benefit schedule of $50,000.
Regardless of the benefit schedule, all group life insurance plans are subject to a maximum level of coverage. The benefit maximum places an upper limit on the basic group life insurance coverage available to employees.
Non-Evidence Maximum (NEM)
The amount of basic life insurance coverage above which the employee must provide evidence of insurability is referred to as the non-evidence maximum. The NEM is a very important feature of a basic group life insurance plan as it represents the minimum amount of coverage for which all employees are eligible (subject to income requirements). For employees who may not qualify for an individual life insurance policy, the NEM allows them to obtain coverage through their group benefit plan. Generally, higher non-evidence maximums are available to larger groups and to groups considered to be lesser risks.
Waiver of Premium
Employees who become totally and permanently disabled while insured and continue to be so disabled for a period of at least 6 months will continue to have life insurance coverage with no premium requirement. Waiver of premium is usually only available to employees under the age of 65 who are under the regular care of a physician.
If the group life insurance coverage terminates for an employee because employment or membership in the plan terminates or because he or she no longer qualifies for coverage, the plan can be converted into an individual policy. Typically, the policy is convertible to either a one year convertible term policy (for employees under the age of 65), a term to age 65 policy or a regular plan of permanent insurance. There is usually a maximum amount of insurance that can be converted (typically $200,000). The application to convert the policy and the first month of premium must be received by the insurer within 31 days of termination of the employee's insurance.
The premium for the converted policy is based on the type of policy and the age, sex and smoking status of the employee. Medical evidence is not required to convert the policy. Therefore, the conversion privilege is mainly of benefit to employees who would otherwise be declined for life insurance coverage or who are only eligible for coverage based on a substandard risk. For employees who qualify for standard rates, there are usually more competitively priced policies than the conversion options.
The basic group life insurance coverage is usually reduced at age 65 and terminates at age 70 or retirement. Coverage is reduced to a set percentage of the previous coverage (usually 50%) or to a flat amount. For example, an employee who had $100,000 of basic group life coverage before turning 65 would typically have that coverage reduced to $50,000 upon reaching the age of 65.