United States
Hong KongGroup life: conversion and contributory plans
Group life covers a group under one master contract, with certificates for members. Two sub-items are examined: the conversion privilege, letting a departing member take an individual policy without evidence of insurability, and the split between contributory plans, where the employee pays part, and noncontributory plans, where the employer pays all.
Group life is the coverage most Americans actually have, and the outline gives it two sub-items in a section worth 8 questions. That is a thin allocation for something so common, which tells you the exam wants the two mechanisms rather than a tour of the product.
How a group contract is put together
| Element | Group life | Individual life |
|---|---|---|
| The contract | One master policy held by the sponsor | One policy per insured |
| What the member holds | A certificate of coverage | The policy itself |
| Underwriting | Of the group, not usually the individual | Of the individual |
| Product | Almost always annually renewable term | Any product |
| Cost per unit | Lower | Higher |
Underwriting the group rather than the member is the fact that drives everything else. It is why group cover is cheap, why it usually has no cash value, and why the conversion privilege has to exist: coverage that was never underwritten for you individually disappears the moment you leave the group.
The conversion privilege
A member whose coverage ends because employment or membership ends may convert to an individual policy without proving insurability, within a short window after the group cover stops. Texas requires this. The Insurance Code says a group life policy must provide that a member losing coverage on termination of employment is entitled to have the insurer issue an individual policy, at TIC 1131.110.
- No evidence of insurability is required, which is the whole value of the right.
- The individual policy is priced at the attained age, so it is usually expensive.
- It is normally a permanent form rather than term, because insurers do not want a converted block of term.
- The window is short. Miss it and the right is gone.
Compare that with the convertible feature on individual term insurance and you will find the same idea with a different trigger. There, conversion is an option the owner bought. Here it is a right the law gives a member whose coverage is being taken away. Both exist to protect somebody who has become uninsurable, and both are handled in renewable against convertible.
Contributory and noncontributory
| Contributory | Noncontributory | |
|---|---|---|
| Who pays | Employer and employee share | Employer pays it all |
| Participation required | A high proportion of eligible members | All eligible members |
| Why the requirement | To limit adverse selection when joining is optional | Nobody chooses, so there is no selection to worry about |
| Employee enrollment | The employee must elect | Automatic on eligibility |
The middle rows are the examinable part. If members can choose whether to join, the ones who choose to are disproportionately those who expect to benefit, so the insurer insists that most of the eligible group participates. If nobody chooses, everyone is in and the problem does not arise. Adverse selection again, and it is the reason for a rule that otherwise looks arbitrary.
An employee with a serious heart condition leaves her job, where she had group life coverage. What can she do about the coverage she is losing?
- Nothing, because group coverage ends with employment
- Convert to an individual policy without evidence of insurability, within the conversion window
- Continue the group coverage by paying the premium herself indefinitely
- Require the insurer to issue an individual policy at the group rate
Texas adds more than the general portion does
- General portion
- Section IV, group life, two sub-items, section worth 8
- Texas portion
- Life only, group life, six sub-items, section worth 6
- Texas sub-items
- Eligibility, conversion, dependent coverage, assignment, required provisions, accelerated benefits
- Key sections
- TIC 1131.101 required provisions, TIC 1131.110 conversion, TIC 1131.151 dependents
Group life is a case where the Texas portion carries more detail than the general one. Six sub-items in a 6-question section is a strong hint that group life is worth a question or two of the Texas 30, and the statutory chapter is short enough to read.
The opinion, and the concession
Conversion is the concept to own here, and it is worth owning because the exam uses the word in three different places: term conversion in section I, group life conversion in section IV, and group health continuation in section V. Three mechanisms, similar language, different triggers. Candidates who learn conversion once and assume it transfers get one of the three wrong.
The concession: how long the conversion window runs is set out in the Texas group life provisions and in the certificate, and we would rather point you at TIC 1131.110 and the sections around it than print a period. The Insurance Code is public and we hold the chapter. Read the sentence rather than trusting our summary of it.
Common questions
What is the group life conversion privilege?
The right of a member whose group coverage ends, because employment or membership has terminated, to have the insurer issue an individual policy without evidence of insurability. Texas requires group life policies to provide it at TIC 1131.110. The individual premium is set at the attained age.
What is the difference between contributory and noncontributory plans?
In a contributory plan the employee pays part of the premium and must elect to join, so the insurer requires a high level of participation to limit adverse selection. In a noncontributory plan the employer pays everything and all eligible members are covered automatically.
Does group life build cash value?
Almost never. Group life is generally annually renewable term written under a master contract, which is why it is inexpensive and why it disappears when the member leaves the group. The conversion privilege exists precisely because there is nothing left behind when it ends.
Is converted coverage priced at the group rate?
No. Conversion gives the member a policy without proving insurability, not a policy at the group price. It is issued at the attained age on the insurer's individual rates, which usually makes it considerably more expensive than the group coverage it replaces.