Group life insurance conversion and contribution

Who pays: contributory and noncontributory plans

Group life insurance is one master contract issued to a sponsor — usually an employer, but also a union, a credit union, a trustee or a professional association. The people covered never own a policy of their own; each receives a certificate describing the coverage. The first question about any group plan is who pays the premium.

• Noncontributory: the sponsor pays the whole premium. Because the covered people pay

nothing, the plan must cover every eligible person — 100% participation. That is what protects the insurer against adverse selection: it gets the whole group, healthy and unhealthy alike, not just the people who expect to need the coverage.

• Contributory: the covered people pay part of the premium, usually by payroll

deduction. Participation is voluntary, so the insurer requires a minimum share of eligible people to enrol — customarily 75% for an employer group — before the plan can go into force.

Florida's association-group rule shows the same two tests in statute. A policy funded partly by members' own contributions may be placed in force only if at least 100 of the eligible members elect to contribute, and it may require evidence of insurability from individual members; a policy with no member contribution must insure all eligible members. Florida also bars a nongovernmental self-insured life plan from being contributory at all.

In a contributory plan, an eligible person who enrols during the initial enrolment period is accepted without proof of good health. Someone who declines and asks to join later is a late entrant and can be asked for evidence of insurability, because a late request is exactly the adverse-selection signal the insurer is guarding against.

Tax treatment follows the same line: employer-paid group term life is excluded from the employee's income up to $50,000 of coverage; the cost of coverage above that is imputed as taxable income.

Leaving the group: the conversion privilege

Group coverage belongs to membership in the group. When a person's coverage ends because employment ends, or because they leave the class of people eligible for coverage, Florida requires every group life policy to give them the right to convert to an individual policy with the same insurer:

No evidence of insurability. The insurer must issue the individual policy regardless of the person's health.

The conditions are fixed by statute:

1. Time limit — the person must apply and pay the first premium within 31 days after

the group coverage ends.

1. Form — any form the insurer then customarily issues at that age and amount. The group

policy may exclude term insurance from the choices, so conversion is typically into permanent, cash-value coverage.

1. Amount — no more than the amount of group life that ceased. If the person stays with

the employer but moves into a class with its own group coverage, the new group amount is deducted.

1. Premium — the insurer's customary rate for that form and amount, for the person's

class of risk, at the person's attained age on the new policy's effective date. The privilege guarantees availability, not a group price.

1. No riders required — the individual policy is issued without health or other

supplementary benefits.

What happens inside the 31 days matters too. Coverage is effectively continued through the conversion period: if the person dies before converting, the amount they could have converted is paid as a death claim, whether or not they had applied. Florida's group-life part carries a section devoted to death pending conversion.

The privilege reaches dependents as well. A surviving dependent can convert the coverage that ends because the employee dies, and a dependent who stops being a qualified family member — a child who ages out, for example — can convert while the employee stays insured.

Three more points round out the Florida picture:

• The conversion privilege is an incident of ownership the insured may assign, along with

the right to name the beneficiary.

• These conversion provisions do not apply to group policies issued to a creditor to

insure its debtors.

• A group policy issued in another state that covers Florida residents escapes most of

Florida's group-life rules only if, among other conditions, it still provides the conversion benefit on termination of eligibility.

When the entire master policy ends — the employer cancels the plan rather than the employee leaving it — a separate, narrower conversion rule applies. Treat it as a distinct case from an individual losing eligibility.