6.2 Group Life & Health Insurance

Group vs. Individual: Master Policy and Certificate

Group insurance covers many people under a single contract. The policyowner is the sponsor — usually an employer, but also a labor union, trade association, or trust. The sponsor holds the one master policy that is the actual insurance contract. Individual members do not receive a policy; each insured employee gets a certificate of insurance, a summary that proves coverage exists and states the member's benefits, but is not itself the contract.

The defining difference from individual insurance is the unit of underwriting. In individual insurance the carrier evaluates one applicant's health and habits. In group insurance the carrier underwrites the group as a whole, relying on the law of large numbers and on the group having been formed for a purpose other than obtaining insurance. To prevent unhealthy people from joining solely for coverage, the group must be a natural, pre-existing body.

Eligibility and Participation

To qualify, a group must be an eligible group — an employer group, multiple-employer trust, labor union, or association formed for a reason other than buying insurance. New members typically serve a probationary period (a waiting period such as 30, 60, or 90 days after hire before they can enroll) followed by an eligibility period (a window, often 31 days, during which an eligible new member may enroll without evidence of insurability). Someone who waits past the eligibility period becomes a late enrollee and may have to prove insurability.

The actively-at-work provision is central to group underwriting: a new employee's coverage takes effect only if the person is actively performing job duties on the effective date. An employee home sick that day is not yet covered, which protects the carrier from immediate claims.

Who pays the premium drives participation requirements:

• Noncontributory — the employer pays the entire premium, all eligible employees are covered automatically, and 100% participation is required. Because no one self-selects, adverse selection is minimized.
• Contributory — employees share the cost, so they choose to enroll. Carriers require at least 75% participation of eligible employees to prevent only the unhealthy from signing up.

These percentages are commonly tested distinctions.

Group Rating, Conversion, and Coverage Types

Group underwriting prices the plan two ways. Experience rating uses the specific group's own past claims history to set its premium; it is used for larger groups whose data is statistically credible, so a healthy group earns a lower rate. Community rating charges every group in a geographic area the same rate regardless of its own claims; it is used for small groups and for ACA-compliant small-group coverage to spread risk.

The conversion privilege protects a member who leaves the group. A terminating employee may convert group coverage to an individual policy without proof of insurability, usually by applying within 31 days of losing group coverage. The converted policy is an individual permanent (whole life) form, and its premium is based on the insured's attained age, so it costs more than the group rate. Conversion is what bridges someone to private coverage when COBRA or a new employer plan is unavailable.

Common coverage types in a group package:

• Group term life — the core benefit; usually a flat amount or a multiple of salary, with no cash value, renewed annually.
• Accidental death and dismemberment (AD&D) — pays the principal sum for accidental death and a scheduled capital sum (a percentage) for loss of limbs or sight.
• Group disability income — short-term or long-term replacement of a portion of income, often 60% of salary.
• Dependent coverage — extends life and health benefits to a spouse and children, typically at smaller, capped amounts.

Group disability and AD&D in depth

Group disability income replaces a portion of earnings when an insured cannot work. Short-term disability (STD) typically pays for a few weeks up to about a year after a short elimination period; long-term disability (LTD) begins after STD ends and may continue to age 65 or beyond. Group disability benefits are usually capped at roughly 60% of base salary so the employee retains an incentive to return to work.

A key tax distinction tested on the exam: when the employer pays the premium, disability benefits the employee later receives are taxable income; when the employee pays with after-tax dollars, the benefits are received tax-free.

Accidental death and dismemberment (AD&D) pays a principal sum for accidental death and a capital sum — a scheduled percentage of the principal — for the accidental loss of a limb or sight. For example, loss of two limbs or sight in both eyes commonly pays the full principal sum, while loss of one limb pays half. AD&D covers losses caused by accidental bodily injury only, never sickness, and benefits must be paid within a stated period (often 90 days) after the accident.

Because the group itself is underwritten, individual members generally enroll without a medical exam during their eligibility period. This guaranteed-issue feature, combined with employer cost-sharing and lower per-person administrative expense, is why group coverage is materially cheaper than comparable individual insurance — a recurring contrast the exam draws between the two markets.