Contributory Plan

Rhodri declined coverage under his employer CONTRIBUTORY group term life plan when he was first eligible, because he did not want the payroll deduction. Three years later, after a health scare, he asks to enroll. What will the insurer normally require of him that it did not require at initial eligibility?

1. A.A waiting period equal to the length of his prior employment before coverage can beginA probationary period applies to new hires. It is not the tool used for late entrants.
2. B.Payment of all the premiums he would have paid over the three years he declinedRetroactive premium is not the mechanism. The insurer controls the risk through underwriting, not back premium.
3. C.Evidence of insurability, which the insurer may accept, rate or declineCorrect. Late entrants must satisfy individual underwriting, which is how group plans control adverse selection.
4. D.Nothing beyond the payroll deduction authorization, since group coverage is never individually underwrittenGroup coverage skips individual underwriting only for those who enroll when first eligible. Late entrants are underwritten.

Why: The whole economic bargain of group insurance is that the insurer accepts a defined block of lives without individual medical evidence, in exchange for enrolling people before they know they need coverage. Someone who declines and comes back later is a LATE ENTRANT, and the timing of Rhodri request after a health scare is precisely the adverse selection the insurer must control. Group plans therefore require a late entrant to furnish EVIDENCE OF INSURABILITY, usually a health questionnaire and possibly an examination, and the insurer may decline or limit the coverage. Enrolling during the initial eligibility period would have avoided all of that.

A noncontributory group life plan (employer pays the entire premium) generally must cover what portion of eligible employees?

1. A.100% of eligible employeesCorrect. Full participation is required when the employer pays the entire premium.
2. B.75% of eligible employeesWrong. Approximately 75% is the typical CONTRIBUTORY plan standard.
3. C.50% of eligible employeesWrong. Neither plan type uses a 50% threshold.
4. D.Only employees who pass a physical examWrong. Group coverage does not condition eligibility on medical exams.

Why: When employees pay nothing, all eligible employees must be covered (100% participation), which prevents adverse selection; contributory plans commonly require around 75% participation. Citation: standard group participation requirements under state insurance law. Takeaway: noncontributory = 100%; contributory = ~75%.

A 200-employee firm installs a group term life plan in which employees pay 40% of the premium. Under typical group underwriting standards, the insurer will require enrollment of approximately:

1. A.50% of eligible employeesHalf the group is generally considered too thin to guard against adverse selection in a contributory plan.
2. B.25% of eligible employeesA quarter of the group would leave the plan dominated by those most eager for coverage - exactly the selection risk insurers avoid.
3. C.75% of eligible employeesCorrect. Contributory plans typically carry an approximately 75% minimum participation requirement to control adverse selection.
4. D.100% of eligible employeesFull enrollment is the standard for noncontributory plans, where employees pay nothing and universal coverage is feasible.

Why: Because employees share the cost (a contributory plan), some will decline - so insurers typically require about 75% of eligible employees to enroll. Noncontributory plans, where the employer pays everything, generally must cover 100% of eligible employees.