Group Insurance: Life and Disability Benefits

A. Characteristics of Group Insurance u Definition: an arrangement under which employer makes benefits payable to employees u Examples of benefits: medical, life, disability benefits

u A. Group contract: the employer is the policyholder and employees are issued certificates u B. Group underwriting: minimize adverse selection reduce administrative costs

u 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 u 1. McCarran-Ferguson Act u 2. Eligible groups individual employer trade associations labor union groups

u 3. Contractual provisions uniformity among states common provisions

Federal Regulation 1. Age Discrimination in Employment Act u Prohibits discrimination against workers age >= 40 u Applies to employers with >= 20 employees u Group benefits, except for medical, can be reduced for older employees

u 2. Civil Rights Act u Applies to employers with 15 or more u Requires pregnancy to be treated like any other condition u Pregnancy benefits excluded for dependents u Abortions can be excluded unless life threatening

3.Americans with Disabilities Act u Applies to employers with 15 or more u Disabled persons cannot be denied employment u Disabled persons must be provided the same medical coverage as other employees u Allows certain coverage limitations

II. Group Life Insurance: Term Coverage u A. Most common form is yearly renewable group term u B. Rates increase with age

Contract Provisions u 1. Uniform u 2. Variations due to states rules, company practices and negotiations u 3. Benefit schedules: benefits depend on earnings and position u 4. Eligibility requirements

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

u Settlement options u Premiums u Claims u Grace period u Misstatement of age u Termination

u Disabled employees u Conversion within 31 days u Accelerated benefits

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

u Federal Taxation u 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 u How to provide for postretirement coverage? u Current funding to continue term insurance

u Group Universal Life Insurance u Reasons for Growth 1. Success in individual market 2. Taxation of death benefits in excess of $50, Employer desire to contain costs

u Advantages to employer 1. Little direct cost 2. No ERISA requirements 3. Less pressure to provide postretirement coverage u Advantages to employees 1. Opportunity for postretirement coverage 2. Flexibility in designing coverage

u General Nature 1. Flexible premium 2. Charge made each month to purchase term coverage 3. Cash value = premiums + interest - mortality and expense charges

u 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 u 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

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

u A. Salary Continuation Plans u Uninsured u Eligibility: full time, satisfy a probationary period u Benefits: 100% of salary, duration: certain number of days

u B. Disability Insurance u 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

u Definition of disability 1. Short-term plans 2. Long-term plans u 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 u Other contract provisions: 1. Claims 2. Payment of benefits 3. Rehabilitation

u D. Federal Taxation u 1. Employer contributions tax deductible u 2. Employee contribution not tax deductible u 3. Employer contributions are not considered taxable income to employees u 4. Benefits: fully contributory: not taxable Noncontributory: taxable income

Group Long-Term Care Insurance u A. Reasons for coverage –Aging population –Increasing costs –Inadequate benefits under Medicare –Inability of families to provide care

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

u 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

u 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