CONTRACT PROVISIONS : Beneficiary Designation

Beneficiary Designation
With few exceptions, an insured person has the right to name the beneficiary under his or her group life insurance coverage. The exceptions include dependent life insurance, where the employee is the beneficiary. In addition, the laws and regulations of some states prohibit naming the employer as beneficiary. Unless a beneficiary designation has been made irrevocable, an employee has the right to change the designated beneficiary at any time. While all insurance contracts require that the insurance company be notified of any beneficiary change in writing, the effective date of the change may vary, depending on contract provisions. Some contracts specify that a change will be effective on the date it is received by the insurance company; others make it effective on the date the change was requested by the employee.

Under individual life insurance policies, death benefits are paid to an insured person's estate if no beneficiary has been named or if all beneficiaries have died before the insured. Some group term life insurance contracts contain an identical provision; others stipulate that the death benefits will be paid through a successive beneficiary provision. Under the successive beneficiary provision, the proceeds are paid, at the option of the insurance company, to any one or more of the following survivors of the insured person: spouse, children, parents, brothers and sisters, or executor of the employee's estate. In most cases, insurance companies will pay the proceeds to the person or persons in the first category that includes eligible survivors.

Settlement Options
Group term life insurance contracts covering employees provide that death benefits be payable in a lump sum unless an optional mode of settlement has been selected. Each employee insured under the contract has the right to select and change any available mode of settlement during his or her lifetime. If no optional mode of settlement is in force at the employee's death, the beneficiary generally has the right to elect any of the available options. The most common provision in group term insurance contracts is that the available modes of settlement are those customarily offered by the insurance company at the time the selection is made. The available options are not generally specified in the contract, but information about them is usually given to the group policyholder. In addition, many insurance companies have brochures that describe either all or the most common options available to employees. Any guarantees associated with these options will be those that are in effect when the option is selected.

In addition to a lump-sum option, most insurance companies offer all the following options and possibly other options as well:

- An interest option. The proceeds are left on deposit with the insurance company, and the interest on the proceeds is paid to the beneficiary. The beneficiary can usually withdraw the proceeds at any time.

- An installment option for a fixed period. The proceeds are paid in equal installments for a specified period of time. The amount of any periodic installment is a function of the time period and the amount of the death proceeds.

- An installment option for a fixed amount. The proceeds are paid in equal installments of a specified amount until the proceeds plus any interest earnings are exhausted.

- A life income option. The proceeds are payable in installments during the lifetime of the beneficiary. A choice of guarantee periods is usually available during which a secondary beneficiary or the beneficiary's estate will continue to receive benefits even if the beneficiary dies. The amount of any periodic installment is a function of the age and sex of the beneficiary, the period for which payments are guaranteed, and the amount of the death proceeds.

Premiums
Group insurance contracts stipulate that it is the responsibility of the policyholder to pay all premiums to the insurance company, even if the group insurance plan is contributory. Any required contributions from employees are incorporated into the employer's group insurance plan, but they are not part of the insurance contract and therefore do not constitute an obligation to the insurance company by the employees. Rather, these contributions represent an obligation to the employer by the employees and are commonly paid by payroll deduction. Subject to certain limitations, any employee contributions are determined by the employer or as a result of labor negotiations. Most states require that the employer pay at least a portion of the premium for group term life insurance (but not for other group insurance coverage), and a few states impose limitations on the amounts that may be paid by any employee.

Premiums are payable in advance to the insurance company or any authorized agent for the time period specified in the contract. In most cases, premiums are payable monthly but may be paid less frequently. The rates used to determine the premium for any policyholder are guaranteed for a certain length of time, usually one year. The periodic premium is determined by applying these rates to the amount of life insurance in force. Consequently, the premium actually payable will change each month as the total amount of life insurance in force under the group insurance plan varies. A detailed explanation of premium computations is contained in the discussion on group insurance rate making.

Group insurance contracts state that any dividends or experience refunds are payable to the policyholder in cash or may be used at the policyholder's option to reduce any premium due. To the extent that these exceed the policyholder's share of the premium, they must be used for the employees' benefit. This is usually accomplished by reducing employee contributions or increasing benefits.

Claims
The provision concerning death claims under group life insurance policies is very simple. It states that the amount of insurance under the contract is payable when the insurance company receives written proof of death. No time period is specified in which a claim must be filed. However, most companies require that the policyholder and the beneficiary complete a brief form before a claim is processed.

Assignment
For many years, the owners of individual life insurance policies have been able to transfer any or all of their rights under the insurance contract to another party. Such assignments have been commonly used to avoid federal estate taxation by removing the proceeds of an insurance contract from the insured's estate at death. Historically, assignments have not been permitted under group life insurance contracts, often because of state laws and regulations prohibiting them. In recent years, most states have eliminated such prohibitions; consequently, many insurance companies have modified their contracts to permit assignments, or they will waive the prohibition upon request. Essentially, an assignment is valid as long as it is permitted by and conforms with state law and the group insurance contract. Insurance companies generally require any assignment to be in writing and to be filed with the company.

Grace Period
Group life insurance contracts allow for a grace period (almost always 31 days) during which a policyholder may pay any overdue premium without interest. If the premium is not paid, the contract will lapse at the end of the grace period unless the policyholder has notified the insurance company that an earlier termination should take place. Even if the policy is allowed to lapse or is terminated during the grace period, the policyholder is legally liable for the payment of any premium due during the portion of the grace period when the contract was still in force.

Entire Contract
The entire-contract clause states that the insurance policy, the policyholder's application that is attached to the policy, and any individual (unattached) applications of any insured persons constitute the entire insurance contract. All statements made in these applications are considered to be representations rather than warranties, and no other statements made by the policyholder or by any insureds can be used by the insurance company as the basis for contesting coverage. When compared with the application for individual life insurance, the policyholder's application that is attached to a group insurance contract may be relatively short. Often, most of the information needed by the insurance company is contained in a preliminary application that is not part of the insurance contract. When a group insurance contract is delivered to the policyowner, it is common practice to have the policyholder sign a final "acceptance application," which in effect states that the coverage as applied for has been delivered. Consequently, a greater burden is placed on the insurance company to verify the statements made by the policyholder in the preliminary application.

The entire-contract clause also stipulates that no agent has any authority to waive or amend any provisions of the insurance contract and that a waiver of or amendment to the contract is valid only if certain specified corporate officers of the insurance company have signed it.

Incontestability
Like individual life insurance contracts, group insurance contracts contain an incontestability provision. Except for the nonpayment of premiums, the validity of the contract cannot be contested after it has been in force for a specified period, generally either one or two years. During this time, the insurance company can contest the contract on the basis of policyholder statements in the application attached to the contract that are considered to be material misrepresentations. Statements made by any insured person can be used as the basis for denying claims during this period only if such statements relate to the individual's insurability. In addition, the statements must have been made in a written application signed by the individual, and a copy of the application must have been furnished to either the individual or his or her beneficiary. It should be pointed out that the incontestability clause does not concern most covered persons because evidence of insurability is not usually required and, thus, no statements about individual insurability tend to be made.

Misstatement of Age
If the age of any person covered under a group term life insurance policy is misstated, the benefit payable is the amount that is specified under the benefit schedule. However, the premium is adjusted to reflect the true age of the individual. This is in contrast to individual life insurance contracts, where benefits are adjusted to the amount that the premium paid would have purchased at the true age of the individual. Under a group insurance contract, the responsibility for paying any additional premium or the right to receive a refund belongs to the policyholder and not to the individual employee whose age is misstated, even if the plan is contributory. If the misstated age has affected the employee's contribution, this is a matter to be resolved between the employer and the employee.