Participating, individual, and group life policies

Two separate classifications

Participating versus nonparticipating describes eligibility for policy dividends. Individual versus group describes how coverage is issued. These are separate questions: an individual policy can be participating or nonparticipating. Neither classification by itself tells you whether coverage is term or permanent.

Participating policies

A participating policy allows its owner to share in the insurer's divisible surplus through dividends when declared. Favorable mortality, investment earnings, and expenses can contribute to that surplus. Dividends are not guaranteed; an illustration is not a promise. A nonparticipating policy does not provide participation in divisible surplus through policy dividends. This does not eliminate its contractual guarantees. Mutual insurers commonly issue participating policies, but the policy terms determine participation.

Common dividend options are cash, premium reduction, accumulation at interest, paid-up additions, and, when offered, one-year term insurance. Paid-up additions purchase small amounts of permanent insurance with cash value and no further premiums on those additions. They do not make the original policy fully paid up. Accumulation leaves dividends with the insurer to earn interest rather than purchasing additional insurance.

Individual and group coverage

An individual policy is issued to its policyowner and can be tailored to personal needs, subject to underwriting. The owner and insured need not be the same person. Group insurance covers eligible members under a master policy issued to a sponsor, such as an employer. The member's certificate describes coverage under that policy; it is not a separate individual policy. Group plans commonly use eligibility classes and benefit formulas. A contributory plan requires employee contributions; a noncontributory plan is employer-funded. Group coverage often limits individual underwriting for basic benefits, but additional amounts or late enrollment may require evidence of insurability. Exact options and eligibility depend on the contract and applicable law.

Leaving a group

California Insurance Code section 10209 provides that an employee's certificate describes protection and to whom it is payable. For employment termination under that section, the employee may apply and pay within 31 days to convert to an individual policy, without evidence of insurability. The available forms exclude term insurance; the premium reflects attained age, risk class, form, and amount. The conversion amount equals the protection at termination. If the employee dies during that 31-day period before the individual policy becomes effective, the convertible amount is payable under the group policy even without an application or first premium. Conversion creates an individual policy; it is different from portability, which continues group coverage when the plan offers it.