CFP

Group Disability Insurance - Common Features

Some of the basic features of group disability insurance are discussed here.

Master Contract
The group life policy insures a number of people under one contract, typically eliminating the need for individual underwriting and evidence of insurability. The employer is the applicant and policyholder who chooses the insurance as well as the amount and type of coverage for the group's members. It is the employer and the insurer who are parties to the group disability insurance contract.

In considering a group for coverage, the insurer looks at the group's health as a whole, rather than by each individual. Experience rating sets the group's premium based upon its prior claims experience. However, for smaller groups, insurers often retain the right to conduct individual underwriting as even one bad risk can significantly impact the group's claims experience. Individual underwriting most often occurs either when the insurer first accepts the group or when an employee attempts to join the plan after his or her initial decision not to participate. It would be uncommon for the insurer to reject an entire group based upon a sole bad risk. Rather, the insurer could elect to reject the individual or charge him or her an increased premium.

Flow of Insureds
Insured members enter and exit the group and coverage. The constant flow of lives keeps replenishing the group as old members leave with the resultant effect of continued stability of the group's age and health.

Affordability
Group disability insurance is less expensive than individual coverage per unit of benefit. The reasons are two fold:

  • Lower administrative, operational and selling expenses
  • Frequent employer cost sharing. A plan may be
    - Non-contributory, where the employer pays the entire premium, Or
    - Contributory, where the employee is required to pay some portion of the premium.
Dividend Share
Group disability policies, as with group life policies, do not participate in any employer dividend distributions. Therefore, they are referred to as non-participating.

Regulation
The Employment Retirement Income Security Act (ERISA) of 1974 regulates most group disability policies. Individual policies as well as group policies of employers of governmental agencies of the state or federal government are exempt from ERISA. Among the requirements of ERISA for employees is that of disclosure: the contract holder and employees are required to receive a Summary Plan Description (SPD) that describes basic eligibility requirements under the plan.




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