Life Insurance as an Employee Benefit

• Both group life insurance and group health

insurance are widely used as a part of the
compensation package for workers.

• In part, the growth of group life and health

insurance has been encouraged by collective
bargaining and the demands of the work force.

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 Life Insurance as an Employee Benefit

• However, a more important impetus has probably

been the favorable tax treatment of contributions
made by employers for such coverage.

• Before turning to our discussion of life insurance

as an employee benefit, we should first
distinguish among the broad classifications of
life insurance.

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 Group Life Insurance

• Group life insurance is a plan whereby coverage

can be provided for a number of persons under
one contract, called a master policy, usually
without evidence of individual insurability.

• It is generally issued to an employer for the

benefit of employees, but may also be used for
other closely knit groups.

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 Group Life Insurance

• Group life insurance programs sponsored by an

employer may be contributory or
noncontributory.

• Under a contributory plan, which is the more

common approach, employer and employees
share the cost of the insurance.

• Under a noncontributory plan, the employer pays

the entire cost.

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 Group Life Insurance

The NAIC Model Group Life Insurance Law

definition adopted by most states, authorized
groups for the following classes:
1. Current and retired employees of an employer
2. Multiple employer groups
3. Members of a labor union
4. Debtors of a common creditor
5. Members of associations formed for purposes
other than to obtain insurance.
6. Members of credit unions.
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 Discretionary Groups

• In addition to the standard groups defined in the

NAIC model law, for which specific approval is
not required, some states law authorize “any
other group approved by the commissioner,”
generally referred to as “discretionary groups.”

• Discretionary groups require specific approval by

the insurance commissioner, which will be
granted only if the proposed coverage meets a
balancing test set forth in the law.

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 Distinguishing Features of Group Life
Insurance

• The basic feature of group life insurance is the

substitution of group underwriting for individual
underwriting.
• This means that there is no physical examination
or other individual underwriting methods
applicable to individual employees.
• The problem of the insurance company is,
therefore, that of holding adverse selection to a
minimum, and many of the features of group life
insurance derive from this requirement.

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 Minimizing Adverse Selection

• When the premium is paid entirely by the

employer, 100 percent of the eligible employees
must be included.

• When the plan is contributory, with the premium

paid jointly by the employer and the employees,
not less than 75 percent of the eligible employees
must participate.

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 Minimizing Adverse Selection

• The amount of insurance on each participant

must be determined by some plan that will
preclude individual selection.

• In most instances, either the amount of insurance

is a flat amount for all employees, or it is
determined as a percentage or multiple of the
individual's salary.

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 Minimizing Adverse Selection

• The original group idea of substituting group

underwriting for individual underwriting has
changed somewhat since the beginning of group
life insurance.

• Under the first group life insurance laws, the

definition of “groups” for insurance purposes
was restrictive, requiring a minimum number of
members, usually 50 or 100 lives.

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 Minimizing Adverse Selection

• Over time, statutory requirements concerning the

minimum number of individuals in a “group” has
shrunk, and with the decrease in the number, the
nature of group underwriting has changed.
• As the minimum number of members required for
group coverage fell, insurers introduced
elements of individual underwriting and state
laws often allow insurers the right to require
evidence of insurability for small groups.

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 Group Term Life Insurance

• The Internal Revenue Code Section 79 exempts

from taxable income of employees amounts paid
by their employer on the first $50,000 of group
term life insurance.

• While the premium on such coverage is not

taxable to the employee, it is nevertheless
deductible by the employer as a business
expense.

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 Group Term Life Insurance

• For each $1,000 of coverage in excess of $50,000,

the employee must include as income an amount
that represents the taxable value of the premium
paid by the employer.

• The taxable value of group term life insurance in

excess of $50,000 is not the amount actually paid
by the employer, but rather an imputed cost
contained in the regulations.

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 Group Term Life Insurance

• Section 79 provides that the cost shall be

determined on the basis of uniform premiums
computed on the basis of five year age brackets.

• Rates prescribed by the IRS are used in imputing

income to employees for group term life
insurance in excess of $50,000.

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 Table 32.1
Uniform Premiums for $1,000
Group Term Life Insurance
5 year Age Cost per $1,000
___________Bracket________Per Month________
Under 30 $.08
30 to 34 .09
35 to 39 .11
40 to 44 .17
45 to 49 .29
50 to 54 .48
55 to 59 .75
60 to 64 1.17

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 Nondiscrimination Definitions

• A group term life insurance plan will be

considered nondiscriminatory if it does not
discriminate in favor of key employees as to
eligibility and amount of benefits.
• A plan is nondiscriminatory if it benefits 70% or
more of all employees; at least 85% of all
employees who are plan participants are not key
employees.

32-16
 Nondiscrimination Definitions

• The nondiscrimination requirement can be

satisfied if the amount of insurance bears a
uniform relationship to total compensation of the
persons covered.

• This means that a formula that provides life

insurance equal to say, two times the individual's
annual salary is nondiscriminatory, even though
it produces a higher amount of life insurance for
more highly compensated individuals.

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 Contributory-Noncontributory Plans

• Under a contributory plan, the employee pays,

normally through payroll deduction, a flat rate
regardless of age, and the employer pays the
balance.
• Usually, the cost is not shared equally between
the employee and the employer, and the employer
pays a larger share of the cost.
• The customary flat charge paid by employees is
60 cents per month per $1000 of insurance.

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 Contributory- Noncontributory Plans

• The contribution of the employer will be high for

older employees, yet the contribution for all
employees remains relatively constant.
• As older employees retire, die, or leave the firm,
their places are taken by younger workers, and as
a consequence the age composition of the group
remains quite stable.
• Under a noncontributory plan, the employer pays
the entire cost of the program.

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 Cost of Group Life Insurance

The cost of group life insurance is relatively low.

• First, the basic plan under which most group life
insurance is provided is yearly-renewable-term
insurance.
• Second, the expenses of medical examinations
and other methods of determining insurability
are largely dispensed with.
• Mass selling and mass administration reduce
administrative costs.

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 Rating

• Most group insurance is experience rated, which

means that the group's past experience affects
the premium.
• If the group's experience was good (i.e., better
than average), then both participating and
nonparticipating companies allow a credit to the
policyowner.

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 Rating

• This credit, usually referred to as a dividend,

actually takes the form of a reduction in the next
year's premium.

• Of course experience rating can also reflect bad

experience. When this is the case, the premium
for the next year is increased.

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 Coverage Terms

• The coverage of most group life insurance

contracts is extremely liberal; there are no
exclusions, and the insurance proceeds will be
paid for death from any cause, including suicide,
without restrictions as to time.

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 Conversion Privilege

• Most groups policies include a conversion

provision, under which an insured employee may,
within 31 days after ending employment, convert
all or a portion of the insurance to any form of
individual policy currently offered by the
insurance company, with the exception of term
insurance.
• Conversion is at the employee’s attained age and
cannot be refused by the insurer.

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 Group Ordinary Life

1. Group permanent insurance with cash value.

2. The premium is divided into two parts:
• One part represents payment for $50,000 term
insurance, as defined by IRS regulations and is
paid by the employer.
• Second part represents the contribution to cash
value and is paid by the employee or employer.
• If the employer pays the entire premium, the
contribution to the cash value is taxable to the
employee.
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 Group Paid-Up Life

1. Provides a limited amount of life insurance to

employees at retirement.

2. Paid-up units of whole life are purchased during

the employee’s working years, in combination
with decreasing term insurance.

3. Whole life units are purchased by the

employee’s contributions.

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 Group Universal Life

1. Similar in most respects to individual universal

life insurance.

2. Usually written without evidence of insurability.

3. Lower administrative cost than individual

universal life.

4. No tax advantage in employer funding and

premiums are usually paid by the employee.

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 Survivor Income Benefit Insurance

1. Life insurance payable to dependents as a

monthly benefit rather than lump sum.

2. Benefit to surviving spouse terminates if the

spouse remarries.

3. Benefit payments continue until spouse reaches

a specified age (e.g., 65) or until he or she dies.

4. Benefits to children are payable until they reach

a specified age (e.g., 19), die, or marry.
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 Employee Death Benefit

1. In addition to group term life insurance, an

employer may provide a $5000 death benefit to
the beneficiaries of an employee.

2. Republican Balanced Budget Act of 1995, which

was vetoed by the President, scheduled the
elimination of this benefit.

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 Retired Lives Reserve

1. Retired lives reserve life insurance is a

mechanism for continued funding of renewable
term insurance after the employee’s retirement.
2. The employer makes contributions to a trust
fund during the employee’s working years and
premiums are paid from the fund after
retirement.
3. Since TRA-84, retired employees are taxed only
on the value of term life insurance exceeding
$50,000.
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 General Nature of Disability Income Insurance

1. Provides periodic payments to person insured

when he or she is unable to work because of
injury or illness.

2. Coverage may be provided for accidents only or

for accidents and sickness. Coverage for
sickness only is rare.

3. Benefit eligibility presumes loss of income, but

this is usually defined as the inability to pursue
an occupation.
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 Disability Income Employee Benefit

• A worker who is injured on the job is entitled to

workers compensation benefits.

• If he or she is injured away from the job, the need

for income is just as real.
• A disability income employee benefit replaces a
part of a worker’s income when he or she is
unable to work because of a nonoccupational
accident or illness.

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 Short-Term Versus Long-Term Disability

1. Short-Term disability provides coverage for

disabilities up to 2 years.

2. Long-Term Disability (LTS) provides coverage

for disabilities longer than 2 years, often until
age 65.

3. Distinction between short-term disability and

long-term disability is reflected in pricing,
underwriting, and the breadth of coverage.

32-33
 Disability Income Contracts

Perils Covered

1. Accident only

2. Accident and sickness

32-34
 Disability Income Contracts

OCCUPATIONAL AND NONOCCUPATIONAL

1. Most short-term disability is written on a non-
occupational basis.
2. Some contracts provide “wrap-around”
coverage.
3. Long-term policies may be written on a non-
occupational basis or may provide coverage for
both occupational and non-occupational
disabilities.

32-35
 Disability Income Contracts

WAITING PERIODS AND LIMITATIONS

1. Waiting Periods in disability income policies act
like a deductible.
2. Insurance companies generally limit percentage
of individual’s income they will insure
• about 60% of worker’s wage under short-
term policies, and
• 75% to 80% under long-term disability

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 Definitions of Disability

1. Own occupation
2. An occupation for which insured is or might
easily become qualified
3. Any occupation

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 Definitions of Injury

1. Accidental bodily injury

2. Bodily injury by accidental means

32-38
 Definitions of Sickness

1. Sickness commencing after policy inception.

2. Sickness first manifesting itself after inception.
3. In most states, only preexisting conditions that
manifested themselves during prior 5 years may
be excluded.
4. Group disability income plans tend to have no
exclusions or less restrictive exclusions for
preexisting conditions.

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 Taxation of Disability Income Benefits

1. Benefits from individually-owned disability

income policies are not subject to federal income
tax.

2. Premiums paid by individuals for disability

income insurance are not deductible for federal
tax purposes.

3. Sick pay and other disability income payments

that have been paid for by the employer are
treated essentially as wages and taxable to the
employee.
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 Rehabilitation Provision

In addition to the partial disability and residual

disability benefits, some long-term disability
contracts include a rehabilitation provision, which
provides for continuation of disability benefits or
other financial assistance while a totally disabled
person is retraining or attempting to acquire skills
to return to work.

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 Design of a Disability Income Benefit
Program

• From the variety of provisions discussed, it is

clear that the cost of a disability income benefit
program can be controlled by the design of the
program.

• A major goal in this respect is to coordinate the

benefits of the disability income coverage with
protection from other sources, most notably
OASDI and workers compensation insurance.

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 Design of a Disability Income Program

• In addition, when the firm also offers paid sick

leave, the waiting period under the program
should be coordinated with the paid sick leave
program.

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 Design of a Disability Income Program

• A major cost-control measure for a disability

income program is rehabilitation.
• It is generally agreed that it is beneficial to the
employer and to the disabled person to
encourage the employee to return to work as
soon as possible.
• For this reason, the design of a disability income
program should include some consideration of
for the return of disabled workers to gainful
employment.
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 Design of a Disability Income Program

• For temporary disabilities, this may involve a

return to light duty or a gradual return to the
individual’s previous position.
• For permanent disabilities, it may include
vocational evaluation and retraining for a
different occupational specialty.
• Under the provisions of the Americans With
Disabilities Act, the employer will be required to
make reasonable accommodations to facilitate
the disabled worker’s employment.
32-45