2.5 Group & Specialized Policies

Group Life Insurance

Group life insurance covers many people — usually employees of one employer or members of an association — under a single master contract held by the sponsor. The members do not each get a policy; each receives a certificate of coverage evidencing their protection. Most group life is annually renewable term, though some plans offer permanent options.

The big advantage is that members generally need no individual underwriting — they qualify by being part of the group. The group is underwritten as a whole, so a single unhealthy member cannot be singled out and declined. Coverage amounts are often set by a formula (for example, one or two times salary) rather than by individual application, which removes adverse-selection incentives.

The employer (the policyowner) holds the master contract, pays or collects premiums, and can typically deduct its share. Employer-paid group term up to $50,000 of coverage is income-tax-free to the employee; the cost of coverage above $50,000 creates imputed income (taxable under IRS Table I rates). This $50,000 threshold is a favorite exam fact — anchor it firmly.

Conversion, Contributory vs Noncontributory

When a member leaves the group, the conversion privilege lets them convert group coverage to an individual permanent policy without proof of insurability — typically within 31 days. The individual premium is based on attained age, and the converted policy is usually whole life. The converted face amount generally cannot exceed the group coverage being lost.

Who pays the premium splits group plans into two types:

Contributory plans require the employee to pay part of the premium, so insurers require about 75% participation to guard against adverse selection. Noncontributory plans are fully employer-paid, so 100% of eligible employees must be covered — because no one pays, no one self-selects out.

Exam trap: match the participation number to the funding. The 75% figure goes with contributory (shared cost); the 100% figure goes with noncontributory (employer-only). Reversing them is the most common distractor on group questions.

Credit Life and Industrial (Home Service) Life

Credit life insurance is decreasing term that pays off the outstanding loan balance if the borrower dies, so the benefit declines as the loan is repaid. The creditor (lender) is the beneficiary, up to the amount owed. Regulators cap coverage at the loan balance to prevent the lender from profiting beyond the debt, and the borrower (debtor) is the insured who usually pays the premium.

Credit life is commonly sold on auto, personal, and mortgage loans. Because the benefit tracks a falling balance, it behaves exactly like decreasing term, and the exam may test it as an applied example. Coverage ends when the loan is paid off.

Industrial life insurance — also called home service or debit insurance — is small-face permanent coverage (historically a few thousand dollars) marketed for final expenses. Its hallmark is that an agent collects premiums in person at the insured's home, traditionally weekly or monthly, which is the origin of the "debit" agent. It is a legacy product still tested for its definition and home-collection feature.

Juvenile Policies and the Payor Rider

Juvenile insurance is a policy written on the life of a child, typically applied for and owned by a parent or grandparent. A classic design is the jumping juvenile policy, whose face amount automatically increases (jumps) — often fivefold — when the child reaches a set age (such as 21), with no premium increase and no new evidence of insurability.

Juvenile policies commonly include a payor rider (payor benefit): if the adult premium-payer dies or becomes disabled before the child reaches a stated age (often 21 or 25), the rider waives the remaining premiums while keeping the child's coverage fully in force. The rider protects against the payer's death or disability, not the child's — a frequent exam trap.

Why buy juvenile coverage? Parents lock in a child's insurability early (a later illness cannot block coverage), build modest cash value, and secure low premiums based on the child's young age. Because the insured is a minor, the policy needs an adult owner who controls it until the child reaches majority, at which point ownership can transfer to the now-adult insured.

Key-Person and Buy-Sell Plans

Businesses use life insurance two main ways the exam tests.

Key-person (key-employee) insurance: the business is the applicant, owner, premium-payer, and beneficiary on the life of an essential employee. If that key person dies, the death benefit cushions lost revenue and replacement-hiring cost. The employee must consent in writing, but the business holds all rights; premiums are not tax-deductible and the death benefit is generally income-tax-free.

Buy-sell agreements fund the purchase of a deceased owner's interest at an agreed price, so survivors keep control and heirs get cash. Two structures:

• Cross-purchase: each owner buys a policy on each other owner (n owners = n x (n-1) policies).
• Entity (stock-redemption): the business buys one policy on each owner (n policies) and redeems the deceased owner's share.

Worked example — counting policies: with 4 owners, cross-purchase needs n x (n-1) = 4 x 3 = 12 policies, while an entity plan needs just 4. The policy-count explosion is why entity plans are preferred as the number of owners grows. In both, the death benefit provides cash to buy out the deceased owner's heirs at the agreed valuation.