Group life insurance conversion and contribution

Two questions every group life plan answers

Group life insurance is written under one master policy issued to a policyholder, usually an employer, a union or an association. Each insured person receives a certificate, not a policy (N.Y. Ins. Law § 4216(a)(1)). This lesson covers two features that exam questions return to again and again: who pays the premium (contribution) and what happens when the coverage ends (conversion).

Contribution: noncontributory versus contributory

• Noncontributory plan. The policyholder pays the entire premium. Because no one has to choose to pay, all eligible members are covered, so the standard underwriting rule is 100% participation of the eligible group.
• Contributory plan. Members pay part of the premium, usually by payroll deduction. Because some will decline, insurers protect against adverse selection by requiring a minimum participation level, commonly 75% of eligible members.

Either way, amounts of insurance must follow a plan that precludes individual selection, such as a flat amount, a multiple of salary or a schedule by job class (§ 4216(b)(1)). This is what lets group coverage be written without evidence of insurability.

Other contribution rules worth knowing:

• Premiums are experience-rated: the insurer may readjust the rate at the end of any policy year based on the group's claims, retroactive only for that year (§ 4216(c)(2)).
• For groups written under § 4216(b)(12), (13) or (14), which include qualifying association groups, a dividend or rate reduction may lower the policyholder's cost, but any amount by which members' own contributions exceed the net cost of the insurance must go back to the members, as cash or as a premium reduction, unless the member assigns it to the policyholder (§ 4216(h)(1)).
• For those same groups, a member who is told that keeping the coverage will cost more than 133% of the benchmark net premium may convert as though eligibility had ended (§ 3220(a)(6)).
• Tax treatment, standard federal rule: employer-paid premiums for group term life are deductible to the employer, and the cost of the first $50,000 of coverage is not taxable income to the employee.

Conversion: keeping coverage when the group ends

The conversion privilege lets a covered person buy an individual policy from the same insurer without evidence of insurability.

• Trigger events. Employment or membership ends, the person leaves the eligible class, or the master policy itself is terminated. Converted coverage can include the dependents who were insured under the group, and the right also passes to a surviving spouse on the member's death, to a child who reaches the limiting age, and to a spouse on divorce or annulment (§ 3220(a)(7)). A member whose employment ends because of total and permanent disability also keeps a conversion right (§ 3220(a)(6)).
• The 31-day window. Application and first premium are due within 31 days after group coverage ends (§ 3220(a)(6)). Group coverage continues through that window, so if the person dies during the 31 days, the amount that could have been converted is paid as a death benefit even though no application was made.
• Notice of the privilege. The person must be told of the conversion right within 15 days before or after the event. Notice given 15 to 90 days late extends the window to 45 days after the notice; with no notice within 90 days, the privilege expires at the end of those 90 days (§ 4216(d); § 3220(a)(8)).
• Form and premium. The new policy is a permanent (cash value) form the insurer customarily issues, not term, though the member may elect one year of term insurance first (§ 3220(a)(6)). Premium is based on the person's attained age and the insurer's standard rate for that class. The effective date is the day group coverage ended (§ 3220(a)(7)).
• Amount. Up to the group amount in force when coverage ended. Replacement group life coverage obtained within 45 days reduces that amount only in two cases: when the policyholder or insurer terminates the master policy and the policy contains that limiting provision, and when employment ends because of total and permanent disability. An employee who simply leaves the job is not subject to that offset, so a new employer's group plan does not reduce the conversion (§ 3220(a)(6)).
• Contest and suicide. Statements used to get the group coverage can be used against the conversion policy only as they could have been against the group coverage, and the conversion policy cannot exclude suicide after two years from the date the person first became covered under the group (§ 3220(a)(6)).

Exam pattern: no medical questions, 31 days, attained age, individual permanent form, and a death benefit if the insured dies inside the window.