Group Life Insurance

Hollins Group asks its group life insurer to let each employee simply pick whatever face amount he or she wants, from 25,000 dollars up to 500,000 dollars, with no medical questions. The insurer refuses and insists that amounts be set by a schedule tied to salary bands and job classification. What is the insurer central reason?

1. A.Federal law caps the amount of life insurance any single employee may carry through an employer plan.Wrong. There is no federal cap on group life coverage amounts. Tax rules affect how coverage is TAXED, not how much may be provided.
2. B.Schedules make administration cheaper, which is the only reason insurers use them.Wrong. Administrative convenience is a side benefit. The insurer objection is an underwriting objection, not a clerical one.
3. C.Free individual choice of amount invites adverse selection, so amounts must be set by classes tied to conditions of employment.Correct. Removing individual selection is what allows the insurer to underwrite the group as a whole rather than each life.
4. D.A schedule is required so the employer can be named beneficiary of the larger certificates.Wrong. Employers are generally barred from being beneficiaries under employee group life certificates, and that has nothing to do with the schedule.

Why: A group benefit schedule must fix coverage amounts by conditions pertaining to EMPLOYMENT, such as salary, job classification, or length of service, rather than by individual choice. The reason is adverse selection: if each employee freely selects the amount, those in poor health will elect the maximum and healthy employees will elect little or nothing, and the resulting claim experience will not match the rates charged. Tying the amount to an employment-related class removes individual selection from the equation, which is what makes group underwriting of the group as a whole possible in the first place. This is also why any employee-elected amount above the schedule normally requires evidence of insurability.

Group life insurance is typically:

1. A.Fully underwritten for each personIndividual underwriting is exactly what this arrangement avoids. Evaluating the group as a whole is what makes coverage reachable for employees who might not qualify on their own.
2. B.Only sold to individualsThis describes individual coverage. The arrangement in the stem is written across a body of people connected by employment or membership.
3. C.Issued without individual underwriting and tied to employmentCorrect - group coverage skips individual exams.
4. D.Always permanent with cash valueGroup coverage is generally term, renewed while the connection lasts, and it typically ends when the employment does. Cash value accumulation is not a standard feature of it.

Why: Group life is usually issued without individual underwriting and is tied to employment or membership.

Rowan Delacroix declined the optional supplemental coverage under the group life plan of Brightlake Mills when first eligible. Eleven months later her first child is born, and she asks whether she may now add supplemental coverage without completing a health questionnaire. What feature of most group plans is she asking about?

1. A.A qualifying life event special enrollment window, which lets her add or increase coverage without evidence of insurability.Correct. Defined life events open a limited enrollment window precisely because the request is prompted by the event rather than by a health change.
2. B.The conversion privilege, which lets her buy coverage without evidence of insurability.Wrong. Conversion is triggered when group eligibility ENDS, such as on termination of employment. Rowan is still employed and still eligible.
3. C.The extension of death benefit provision, which continues coverage after a change in status.Wrong. That provision continues a death benefit for a totally disabled former employee. It has nothing to do with adding coverage.
4. D.The actively-at-work requirement, which waives underwriting for anyone at work on the day of the request.Wrong. The actively-at-work rule is a condition for coverage to TAKE EFFECT, not a mechanism for waiving evidence of insurability.

Why: Group plans commonly provide a SPECIAL or QUALIFYING LIFE EVENT enrollment opportunity. Events such as marriage, the birth or adoption of a child, or the loss of a spouse coverage open a limited window in which an eligible employee may enroll or increase coverage without submitting evidence of insurability, even though he or she declined at first eligibility. The rationale is that the life event, not a change in health, is what prompted the request, so the usual late-entrant anti-selection concern is much weaker. Outside such a window, a late entrant who declined when first eligible must ordinarily prove insurability.

A university buys a single life insurance contract covering everyone travelling on any university-sponsored trip. No individual is named, no certificates are issued to travellers, and the covered persons change from trip to trip. What kind of coverage is this?

1. A.Group life insurance with individual certificates issued to each covered person.Ordinary group life enrols identifiable members and issues each a certificate summarising the master contract. Here nobody is enrolled and no certificates exist.
2. B.Franchise, or wholesale, life insurance.Franchise coverage issues separate INDIVIDUAL policies to members of a group, usually at a discount and with simplified underwriting. It is the opposite of a single unnamed-class contract.
3. C.BLANKET life insurance, covering a constantly changing, unnamed class defined by a common activity or status, with no individual certificates.Correct. One contract covers whoever happens to be in the defined class, such as travellers on a sponsored trip, and membership shifts continuously without enrolment.
4. D.Credit life insurance.Credit life insures a borrower for the benefit of a creditor, in an amount tied to the outstanding debt. Nothing in this arrangement involves a loan.

Why: BLANKET life insurance covers a class of persons defined by a common activity or status rather than by name, where the membership of that class is constantly changing. There is one policy, held by the sponsoring organisation, and no individual certificates or enrolment. Typical blanket groups include passengers of a common carrier, students on school activities, campers and volunteers.