Continuation and Conversion
When employees leave their jobs, they typically lose group life insurance coverage. However, certain rights exist to continue or convert coverage. Understanding these options is crucial for the licensing exam.
Conversion Privilege
The conversion privilege allows departing employees to convert their group term life coverage to an individual policy without providing evidence of insurability.
How Conversion Works
| Step | Description |
|---|---|
| 1. Triggering event | Employment ends or employee becomes ineligible |
| 2. Notification | Employer must notify employee of conversion right |
| 3. Application | Employee applies within 31 days (typically) |
| 4. Premium | Based on attained age at individual rates |
| 5. Coverage | Policy issued without medical underwriting |
Key Conversion Features
| Feature | Description |
|---|---|
| No medical exam | Coverage issued regardless of health status |
| Policy type | Usually whole life (not term) |
| Coverage amount | Limited to amount of group coverage (may have maximum) |
| Premiums | Higher than group rates; based on individual attained-age rates |
| Time limit | Must apply within 31 days (or as specified) |
When Conversion Is Available
| Event | Conversion Right |
|---|---|
| Termination of employment | Yes |
| Reduction in coverage due to age | Yes |
| Plan termination | Often limited conversion available |
| Death during conversion period | Death benefit may still be payable |
Death During Conversion Period
If an employee who was eligible for conversion dies within the 31-day conversion period:
- The death benefit is payable under the group policy
- Applies even if the employee had not yet applied to convert
- Coverage amount limited to what could have been converted
Exam Tip: The 31-day conversion period is critical. If an insured dies during this period without having converted, the group policy still pays the benefit. This protects employees during the transition.
Portability Option
Portability allows employees to continue their group coverage as an individual (but still group-rated) policy when leaving employment.
Portability vs. Conversion
| Feature | Portability | Conversion |
|---|---|---|
| Coverage type | Same term coverage continues | Converts to individual whole life |
| Rates | Group rates (better) | Individual rates (higher) |
| Medical underwriting | Usually none | None |
| Coverage amount | May continue same amount | May be limited |
| Availability | Not all plans offer it | Required by law in most states |
Portability Eligibility
Portability is typically available when:
- Employment ends voluntarily or involuntarily
- Employee is under a certain age (e.g., 70)
- Coverage did not end due to nonpayment of premium
Important Portability Notes
- Portability is not the same as conversion
- Employees who port coverage generally cannot later convert
- Portable coverage remains term insurance at group rates
- Employee pays full premium directly to insurer
Notification Obligations
Employers have critical notification responsibilities when group coverage ends.
Employer Notification Requirements
| Notification | Description |
|---|---|
| Conversion notice | Must inform employee of right to convert within specified timeframe |
| Portability notice | If available, must explain this option |
| ERISA requirements | Summary of Material Modifications (SMM) for plan changes |
| Timing | Must be timely—failure can create employer liability |
Consequences of Failure to Notify
If an employer fails to properly notify an employee of conversion rights:
- Employer may be liable for the death benefit
- Employee or beneficiaries may have legal claims
- Employer may face ERISA penalties
- State regulators may take action
Important Distinctions
COBRA Does NOT Apply to Life Insurance
A common misconception: COBRA continuation does not apply to life insurance.
| Coverage Type | COBRA Applies? |
|---|---|
| Health insurance | Yes |
| Dental insurance | Yes |
| Vision insurance | Yes |
| Life insurance | No |
| Disability insurance | No |
Life insurance continuation is governed by the conversion and portability provisions of the group policy, not by COBRA.
Conversion During COBRA Period
Employees continuing health coverage under COBRA should be aware:
- Their life insurance conversion clock is still ticking
- They have only 31 days from job termination for life conversion
- COBRA election does not extend life insurance rights
Covered Spouses and Dependents
Dependents covered under group life may also have conversion rights.
Dependent Conversion Events
| Event | Dependent Rights |
|---|---|
| Employee's death | Dependent may convert their coverage |
| Employee's termination | Dependent coverage ends; may convert |
| Divorce | Former spouse may convert their coverage |
| Child ages out | May convert before aging off the policy |
Separate Applications
- Each dependent must submit their own conversion application
- Time limits apply to each dependent
- Premiums based on dependent's attained age
Key Takeaways
- Conversion allows converting group term to individual whole life without medical underwriting
- Conversion must occur within 31 days of losing coverage
- If an employee dies during the conversion period, the group policy pays the death benefit
- Portability allows continuing term coverage at group rates (not all plans offer this)
- Employees who port coverage typically cannot later convert
- COBRA does not apply to life insurance—only conversion and portability
- Employers have notification obligations; failure to notify can create liability
- Covered dependents may also have conversion rights
An employee who exercises the conversion privilege typically converts their group term life to:
If an employee eligible for conversion dies 15 days after termination without having applied to convert:
COBRA continuation coverage applies to:
Portability differs from conversion in that portability:
13.5 Federal Requirements
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