life and Health Insurance
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chapter201220group20life20and20group20retirement.pptxGroup Life Insurance and Group Retirement Plans
Life and Health Insurance FIN 3660
Chapter 12
Group Life Insurance
Group Life Insurance Policy Provisions
Grace Period Provision – group life insurance policies typically contain a 30- or 31-day grace period provision
Incontestability Provision – limits the period during which the insurance company may use statements in the group insurance application to contest the validity of the master group insurance contract.
Beneficiary Designation – under the terms of a group life insurance policy—unless it is a group creditor life policy—each insured group member has the right to name a beneficiary who will receive the insurance benefit that is payable when that group insured dies.
Portability Provision – allows a group insured whose coverage terminates for certain reasons to continue her coverage under the group plan.
Portable coverage: group insurance coverage that can be continued if an insured employee leaves the group.
Conversion privilege: allows a group insured whose coverage terminates for certain reasons to convert her group life insurance coverage to an individual life insurance policy, usually without presenting evidence of her insurability
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Group Life Insurance
Group Life Insurance Policy Provisions
Misstatement of Age – the misstatement of age or sex provision included in individual life insurance policies specifies that the insurer will adjust the amount of the death benefit payable to reflect a misstatement of the insured’s age or sex.
Settlement Options – if settlement options are available, the group life insurance policy gives the group insured and/or the beneficiary the right to choose a settlement option.
Group Life Insurance Plans
Group Term Life Insurance – group term life insurance policies do not build cash values, and the insurer typically has the right to change the premium rate each year.
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Group Life Insurance
Group Life Insurance Plans
Accidental death and dismemberment (AD&D) insurance – the low cost of AD&D benefits makes them an attractive addition to group insurance plans, especially to employer-employee group plans. When the accidental death benefit is added to a group term life insurance plan, the accidental death benefit amount usually is equal to the amount of the death benefit provided under the basic group term insurance plan.
Group cash value life insurance – used by employers to help employees purchase life insurance coverage that will continue after their retirement, when their group term insurance coverage typically ends. Three commonly offered are…
Group paid-up plans: combines paid-up whole life insurance with decreasing amounts of term life insurance.
Level premium whole life plans: usually is written on a limited-payment whole life plan, such as whole life paid-up at age 65. used to provide retirement income benefits for employees.
Group universal life plans: function much more like individual insurance policies than like typical group insurance policies.
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Group Life Insurance
Group Life Insurance Plans
Group creditor life insurance – insurance issued to a creditor, such as a bank, to insure the lives of the creditor’s current and future debtors. Unlike other group life insurance policies, group creditor life policies designate the policyholder—the creditor—as the beneficiary to receive the benefit payable when a group insured dies.
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Group Retirement Plans
Plan sponsors – the employers and unions that establish plans
Plan participants – the employees and union members the plans cover.
Components of a Retirement Plan
The Plan – the plan sponsor determines the type of plan to establish and the terms of that plan, which are described in a plan document.
Plan document: a detailed legal agreement that establishes the existence of an employer-sponsored retirement plan and specifies the rights and obligations of various parties to the plan.
Plan Doc. Covers: Coverage, Eligibility, Participation, and Vesting Requirements
Describes which group members the plan covers
Specifies the requirements group members must meet to be eligible to participate in the plan.
Specifies when employee participation in the plan becomes effective.
Specifies the plan’s vesting requirements that define when a plan participant is entitled to receive partial or full benefits under the plan even if he terminates employment prior to retirement.
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Group Retirement Plans
The Plan
Benefit formula: describes the calculation of the plan sponsor’s financial obligation to plan participants. Two types:
Defined benefit formula – specifies the amount of retirement benefit a plan sponsor promises to provide to each plan participant. A retirement plan structured according to a defined benefit formula is referred to as a defined benefit plan.
Defined contribution formula – specifies the level of contributions that the plan sponsor promises to make to the plan. The benefit that a participant will receive is not determined in advance of the participant’s retirement but depends on the investment performance of the funds in the plan. A retirement plan structured according to a defined contribution formula is referred to as a defined contribution plan.
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Group Retirement Plans
Plan Administration
Plan administrator: usually named by the plan sponsor, becomes responsible for a variety of aspects of the plan’s operation.
Funding Vehicles
The sponsor of a retirement plan must choose a funding vehicle for the plan.
Funding vehicle: (investment vehicle or funding instrument) is an arrangement for investing a retirement plan’s assets as those assets are accumulated.
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Group Retirement Plans
Types of Retirement Plans
Defined Benefit Pension Plans – under this plan, an employer agrees to provide its employees with a pension—a lifetime monthly income benefit that begins at retirement.
In many countries other than the United States, the term pension plan generally refers to a type of defined contribution plan under which an employer agrees to make periodic contributions of a stated amount on behalf of each plan participant.
Savings Plans – a retirement plan to which a plan sponsor may make contributions on behalf of a plan participant if the participant makes contributions to the plan.
A savings plan is a defined contribution plan; the amount of an employer’s contribution usually is equal to the amount contributed by the employee or is a percentage of that amount, subject to a specified maximum.
401(k) plan: popular type of savings plan; allows employees to make contributions on a pre-tax basis
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Group Retirement Plans
Profit Sharing Plans – a retirement savings plan that is funded primarily by cash contributions payable from the employer’s profits.
Because employer contributions to such plans are based on company profits, and profits can fluctuate, the amount of contributions varies from year to year.
Stock Bonus Plans – a retirement plan into which a plan sponsor that is a stock company makes contributions on behalf of plan participants in the form of the corporation’s stock.
A Stock option plan is regarded as a type of stock bonus plan
Contributions to a stock bonus plan are not dependent upon company profits. The value of the stock shares, however, fluctuates.
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Group Retirement Plans
Government-Sponsored Retirement Plans
The governments of many countries have established plans that provide periodic retirement income benefits to qualified residents.
For most people in the United States, government retirement income benefits are provided under the Old Age, Survivors, Disability and Health Insurance (OASDHI) Act, or, as it is better known, Social Security.
Social Security – a federal program that provides specified benefits, including monthly retirement income benefits, to people who have contributed to the plan during their income-earning years.
In Canada, the federal Old Age Security (OAS) Act is a universal pension plan that provides a pension to virtually all Canadian residents who are age 65 or older, regardless of preretirement wages.
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