Clients want to know: What about group insurance? After reading this, you should understand: The different forms of group insurance coverage Those with group insurance policies have a form and amount of coverage that is controlled by the group policy owner. Understanding the benefits of group policies may illustrate the need for additional personal coverage. Group insurance is provided to employers, professionals, associations, unions, and alumni groups. The theory underlying group insurance is that similar people band together in these organizations. When such sameness exists, it is easier for the insurer to more accurately assess risk and, correspondingly, to estimate premiums. Group insurance has lower premiums for the same amount of coverage provided on an individual policyholder basis, because risk is shared among the group members and administrative costs are lower. The lapse rate due to premium nonpayment is reduced, because the employer pays all or part of the premium, medical exams do not have to be reviewed by the insurer, and the probationary period that most employees go through when they first join the company eliminates employees who change jobs frequently. Because risk is spread among the members of the group, the larger the group size, the better. For this reason, standard group insurance begins with a group not smaller than 25 people. When there are fewer than 25 members in the group, the group is insurable as a small group, but evidence of insurability is often required, because risk is not shared adequately. The smallest groups will be required to show insurability. Risk is further diminished by the requirement that a group include at least 75% of eligible employees (eligibility being determined by the number of employees who have met the requirements of the probationary period). Group insurance is often provided as an employee benefit. Copyright 2011 Oliver Publishing Inc. All rights reserved. 103
LLQP N.B. All of these factors the pooled group of similar individuals, the size requirements for the group, the need for a certain percentage of employees, and the requirement for an employee to be a permanent employee to qualify are all evidence of the insurance company preventing adverse selection. In other words, whereas individual insurance attracts buyers who want and/or need insurance (and pay premiums accordingly), group insurance enrols everyone in the group, regardless of want or need, and may even include those who would not qualify for an individual policy. Many different occupations enjoy the benefits of group coverage offered by their employer or professional associations. Who pays the premium on a group policy? A B C D The group The members of the group The employer of the group The eligible employees of the group Group Life Insurance + FILE See file 24 for group life policy provisions. Group life insurance is available as: Term insurance; Dependent life insurance; Survivor income benefit insurance; Optional group life insurance; Accidental death and dismemberment insurance (AD&D); Creditor group insurance. Over 99% of group life insurance is yearly (one-year) renewable term insurance. The contract for group term life must be renewed annually by the policy owner, not by the individual group members. The policy owner is responsible for paying the premium, and renewing the policy. 104 Copyright 2011 Oliver Publishing Inc. All rights reserved.
Group Insurance The amount of coverage for the individuals covered by the group plan is determined by the policy owner. This is why coverage provided in a group plan sometimes needs topping-up in a personal policy if the coverage is lower than need would indicate. The individuals, however, do name the beneficiary of their group policy. If a group plan provides for dependent coverage, a member of a group life plan can cover his or her spouse (legal or common-law) and dependent children through dependent life coverage. Dependent life provides a specified amount to the group member in a lump-sum payment in the event that his or her spouse or dependent dies. A survivor income plan provides for the spouse and dependent children of a group life plan member who dies. Instead of providing a lump-sum payment, this plan provides an income in the form of ongoing annuity payments. Usually payments are made monthly. The amount received by the survivors will be either a flat amount or a percentage of the amount earned by the deceased to a predetermined maximum. The spouse of a group insurance plan member would receive a lump-sum death benefit if the group plan provided: A B C D Dependent life coverage A survivor income plan Both of these options Neither of these options Optional group life, in addition to the basic life plan. Again, the type of insurance provided is term, but the employee both chooses the amount of coverage and pays for the additional coverage. He or she will also be required to show evidence of insurability. Accidental death and dismemberment (AD&D) insurance coverage provides the same benefit to employees as those who elect such a policy on an individual basis. The death benefit is paid to a beneficiary; the benefit from an injury is paid to the employee. Similar exclusions to individual plans apply to group plans. Group life insurance premiums, if paid by the employee, are paid with after-tax dollars and therefore the life insurance benefit received by the beneficiary will be tax-free. If the employer pays the premium, the employer must declare the premiums paid in respect of the employee as a taxable benefit to the employee, and therefore the life insurance death benefit is tax-free to the beneficiary. Copyright 2011 Oliver Publishing Inc. All rights reserved. 105
LLQP Group life insurance coverage offered by employers is convertible by the employee to individual life insurance, in the event the employee quits the plan membership (usually by quitting the employment), within 31 days of termination of the membership. The employee who opts for conversion is guaranteed to get the coverage because there is no medical proof required but the employee will have to pay the higher premiums of the individual policy based on his attained age at conversion. Group creditor life insurance is provided to creditors to insure the lives of their debtors. A creditor is a person or institution that lends money. For instance, a bank is a creditor. Those who borrow from a creditor are debtors; that is, a debtor owes a debt to the creditor. I ran into income-tax trouble last year when I owed $19,000 and couldn t pay the bill. I went to my bank and they gave me a loan, which uses my house as collateral. They suggested I take out life insurance on the loan so that, if I died, the loan would be repaid and my wife would continue to have the security of our home. I did that, and the premiums on the insurance are included with my monthly loan payment. The policy names the creditor as beneficiary. Coverage is equal to the amount of debt owed to the creditor. The debtor is usually responsible for premiums; however, the creditor can pay the premium or a portion of the premium. Premiums are included with the loan repayment, making it easy for the debtor to repay with no chance of premiums lapsing, providing the debtor makes the loan payments on time. If the debtor is responsible for premiums, then he or she can refuse to take on the policy offered by the creditor and seek coverage elsewhere. Group Disability Income Insurance Group disability income insurance, also known as a wage loss replacement plan, provides an income to a member of a group that is insured during a period of time the insured is not able to work because of illness or an accident. 106 Copyright 2011 Oliver Publishing Inc. All rights reserved.
Group Insurance Membership in a group plan can be complemented by a personal policy. For instance, a personal policy might be used to extend the benefit period provided by the short-term disability plan of the group. The client cannot supplement the group benefit with a personal benefit or with government coverage so that the amount being received in disability benefits is greater than what the client would receive as income. Group disability is structured into short-term disability (STD) and long-term disability (LTD) benefits. STD benefits can range from 15 weeks to 24 months; 12 or 24 months is most common. LTD benefits begin when STD has expired. Definition of Disability Group disability income insurance defines disability quite differently from the definitions in a personal plan. Group insurance has a more restrictive definition of total disability in order to reduce the number of qualifying claims and maintain the integrity of the group. A group insured will receive a disability benefit if he or she meets the own occupation definition for total disability. However, the own occupation definition in group insurance is not the same as own occupation in an individual policy; it is similar to the regular occupation definition found in individual long-term disability income policies. While receiving a disability benefit, the insurer will assess the disabled on an ongoing basis with a view to retraining based on his or her education, experience, and medical condition. If appropriate, the insurer will pay for retraining to restore the disabled to a position that provides a level of income close to, or greater than, what the disabled earned pre-disability. If a disabled person cannot be restored to his or her level of pre-disability earnings by the new position for which he or she has been retrained, LTD will provide a full, or proportionate, benefit for the duration of the benefit period (e.g., two years, five years, or to age 65). Short-term Disability (STD) This form of disability insurance is also called the weekly income benefit. It covers an absence from work caused by an accident or sickness. + FILE See file 25 about how employment insurance can be used to reduce employer costs for short-term disability. Copyright 2011 Oliver Publishing Inc. All rights reserved. 107
LLQP When an accident is the reason for the disability, benefits sometimes begin on the first day. When sickness is the reason for the disability, benefits generally begin on the eighth day. Benefits are paid for a period of up to two years duration, depending on the contract between the policy owner and the insurer, and are a set percentage of pre-disability salary, typically either 60% or 66-2/3% of his or her weekly income. This income is received tax-free if the employer declares the premium paid by the employer as taxable benefit to the employee. If the premium was not declared as taxable benefit, the employee disability insurance benefit, minus the dollar amount the employee may have contributed towards premiums, will be taxed. + FILE See file 26 for a comparison of individual and group disability insurance. When the period of short-term disability insurance ends, if the employee is still unable to work, the employee will begin long-term disability. Long-term Disability (LTD) Benefits for LTD are provided when an accident or illness seriously disables the group member. Benefits begin when STD ends and they will continue for two years, five years, or to age 65. The benefit amount is also a set percentage of predisability salary; 60% is typical if the employee has paid the premium, and 75% is typical if the employer has paid the premium. + FILE See file 27 for group disability exclusions and limitations. To qualify under most definitions, the group member must not be able to work in his or her own occupation for an initial period of disability usually two years. Benefits are paid after this period only if the group member is unable to work in any occupation for which he or she is qualified. I pay the disability premium for my group plan. Because I pay the premiums and not the company, if I go on disability leave, the money I receive will be tax-free. Group Health Insurance Group health insurance can provide all the same benefits as individual plans. They are an appealing employee benefit and again are provided to all members covered by the group plan. 108 Copyright 2011 Oliver Publishing Inc. All rights reserved.
Group Insurance Accident and sickness plans are provided for: Extended health care benefits; Dental insurance; Vision care; Accidental death and dismemberment. Group Extended Health Care Group extended health care, also called major medical, covers: Ambulance services; Prescribed drugs; Private-duty nursing; Appliances, such as back braces and artificial limbs; Diagnostic services. Group Dental Plans Group dental plans reimburse the group plan member to the maximum benefit payable under the plan. Procedures covered typically include: Preventative (basic), diagnostic, and emergency endodontic and periodontic procedures; Restorative and surgical procedures; Prosthodontic procedures; Orthodontic procedures. Vision Care When eyesight correction is prescribed by an optometrist or ophthalmologist, a vision care plan will pay a set amount towards purchase or replacement of an appliance, whether glasses or contact lenses, within a set period of time. Accidental Death and Dismemberment (AD&D) Group Accidental Death and Dismemberment (AD&D) plans can be issued as a stand-alone policy, and they can be added to a group life or health policy. Group AD&D is a low-cost plan and provides an employee benefit at a relatively low cost to the employer. The benefit of a group AD&D plan is usually equal to the amount of the group term life plan. Coverage can be extended by a travel accident benefit as a rider or a separate policy that will cover an accident that occurs while an employee is travelling for the employer. Copyright 2011 Oliver Publishing Inc. All rights reserved. 109
LLQP The benefit is paid as a lump sum if death results from an accident or the insured suffers qualifying multiple dismemberments; a partial benefit is paid for a partial dismemberment. AD&D is available as a basic plan and, additionally, as a voluntary plan. The basic AD&D plan can insure different classes of employees at rates that can be a multiple of salary, such as executives at five times salary, mid-managers at three times salary, and all other employees at one times salary. The employer pays premiums. Voluntary AD&D is an option for employees already covered by a basic plan, although it is sometimes offered to employees who do not have a basic plan. It increases coverage, usually in $25,000 increments, to a maximum of $250,000. There is no medical exam required and premiums, paid by employees through payroll deduction, are very inexpensive. Accidental death or dismemberment resulting from the following activities are not covered by AD&D insurance (that is, they are exclusions): An act of war; Suicide or self-inflicted injury; Service in the armed forces; Flying in a non-commercial aircraft; Committing a criminal offence; Driving while impaired; An accident caused by drugs or intoxicants; Inhaling of poisonous gas, accidentally or intentionally. 110 Copyright 2011 Oliver Publishing Inc. All rights reserved.