Characteristics of Group Insurance
Group life insurance is a single policy that covers multiple people, typically offered through employers or associations. Understanding the unique characteristics of group insurance is essential for the licensing exam.
How Group Insurance Works
Group life insurance is fundamentally different from individual insurance in its structure, underwriting, and administration.
The Master Contract
In group insurance, the insurance company issues a master contract (or master policy) to the group policyholder, typically the employer.
| Component | Description |
|---|---|
| Master contract | The actual insurance policy held by the employer |
| Certificate of insurance | Document given to each covered employee summarizing their coverage |
| Schedule of benefits | Details coverage amounts, often tied to salary or position |
Key Differences from Individual Insurance
| Feature | Group Insurance | Individual Insurance |
|---|---|---|
| Contract holder | Employer (group policyholder) | Individual insured |
| Underwriting | Based on group characteristics | Based on individual risk |
| Policy document | Master policy with certificates | Individual policy |
| Premium payment | Often shared employer/employee | Paid entirely by policyholder |
| Portability | Limited (conversion available) | Fully portable |
Exam Tip: The certificate of insurance is NOT the actual policy—it's a summary document. The employer holds the master contract.
Employer vs. Employee Contributions
Group life insurance plans can be structured in different ways regarding who pays the premiums.
Contribution Types
| Type | Description | Minimum Participation |
|---|---|---|
| Noncontributory | Employer pays 100% of premiums | 100% of eligible employees must be covered |
| Contributory | Employees pay part of premium | Typically 75% of eligible employees must participate |
Why Participation Matters
High participation rates are important for:
- Avoiding adverse selection: Ensures healthy and unhealthy employees both participate
- Spreading risk: Larger pools create more stable risk
- Lower per-person costs: Administrative costs spread across more people
- Meeting insurer requirements: Insurers set minimum participation thresholds
Group Underwriting Principles
Group insurance uses different underwriting criteria than individual insurance.
Group Characteristics Evaluated
| Factor | Consideration |
|---|---|
| Group size | Larger groups mean lower per-person risk |
| Industry type | Some industries have higher mortality risk |
| Age distribution | Average age affects mortality cost |
| Income levels | Affects coverage amounts and persistency |
| Geographic location | Regional mortality differences |
| Plan design | Benefit structure affects cost |
Key Group Underwriting Principles
- Insurance is incidental: The group must exist for purposes other than obtaining insurance
- Flow of members: New members joining and old members leaving maintains fresh risk pool
- Automatic determination: Benefit amounts determined by formula, not individual selection
- Third-party administration: Employer handles enrollment, reducing insurer costs
No Individual Selection
Coverage amounts in group plans are typically determined by:
- Multiple of salary (e.g., 1x, 2x, or 3x annual salary)
- Job classification (executives vs. hourly)
- Flat amount for all employees
- Years of service
This prevents employees from selecting coverage amounts based on their own health status.
Experience Rating
Experience rating adjusts group insurance premiums based on the group's actual claims history.
How Experience Rating Works
| Rating Method | Description |
|---|---|
| Community rating | Same rate for all groups regardless of claims |
| Experience rating | Premiums adjusted based on group's claims history |
| Blended rating | Combination of manual rates and experience factors |
Experience Rating Factors
For larger groups, the insurer considers:
- Prior years' claims experience
- Number of claims
- Severity of claims
- Trend expectations
- Administrative costs
- Risk charges
Impact of Experience Rating
| Claims Experience | Premium Effect |
|---|---|
| Better than expected | Premium credits or reductions |
| As expected | Premiums remain stable |
| Worse than expected | Premium increases |
Exam Tip: Experience rating is more significant for large groups. Small groups may have limited credibility in their claims experience, so insurers rely more on manual rates.
Key Takeaways
- Group insurance uses a master contract held by the employer, with certificates given to employees
- Noncontributory plans (employer pays all) require 100% participation; contributory plans typically require 75%
- Group underwriting evaluates group characteristics rather than individual health
- Coverage amounts are automatically determined by formula to prevent adverse selection
- Experience rating adjusts premiums based on the group's actual claims history
- Groups must exist for purposes other than obtaining insurance
In group life insurance, the actual insurance policy is held by:
A noncontributory group life insurance plan requires:
In group insurance underwriting, coverage amounts are typically determined by:
Experience rating in group insurance means that:
13.2 Types of Group Life Plans
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