CONTRACT PROVISIONS : Termination

Termination
All group insurance contracts stipulate the conditions under which either the insurance company or the policyholder may terminate the contract. The circumstances under which the coverage for a particular insured person will terminate are also specified.

A group term life insurance contract can be terminated for nonpayment of the premium at the end of the grace period. Insurance companies may also terminate coverage for an individual employer group on any premium due date if certain conditions exist and notice of termination has been given to the policyholder at least 31 days in advance. These conditions include the failure to maintain a stated minimum number of participants in the plan and, in contributory plans, the failure to maintain a stated minimum percentage participation. The policyholder may also terminate the contract at any time by giving the insurance company 31 days' advance written notice. Moreover, the policyholder has the right to request an amendment of the contract at any time by notifying the insurance company.

The coverage for any insured person terminates automatically (subject to any provisions for a continuation or conversion of coverage) when any of the following circumstances exist:

- The employee terminates employment.

- The employee ceases to be eligible (for example, if the employee no longer satisfies the full-time work requirement or no longer falls into a covered classification).

- The policyholder or the insurance company terminates the master contract.

- Any required contribution by the employee has not been made (generally because the employee has notified the policyholder to cease the required payroll deduction).

Temporary Interruption of Employment
Most group term life insurance contracts provide that the employer (but not individual employees) may elect to continue coverage on employees during temporary interruptions of active full-time employment. These may arise from leaves of absence, layoffs, or the inability to work because of illness or injury. The employer must continue paying the premium, and the coverage may be continued only for a relatively short period of time, such as three months, unless the time period is extended by mutual agreement between the employer and the insurance company.

Continuation of Coverage for Disabled Employees
Most group term life insurance contracts make some provision for the continuation of coverage on employees whose active employment has terminated due to disability. By far the most common provision in use today is the waiver-of-premium provision (sometimes called an extended death benefit). Under this provision, life insurance coverage is continued without the payment of premiums as long as the employee is totally disabled, even if the master contract is terminated. However, certain requirements must be met:

- The disability must commence while the employee is insured under the master contract.

- The disability must begin prior to a specified age, commonly age 60.

- The employee must be totally disabled. Total disability is normally defined as the employee's complete inability to engage in any gainful occupation for which he or she is or becomes qualified by reason of education, training, or experience.

- The disability must have lasted continuously for a specified time, often six or nine months.

- The employee must file a claim within a prescribed period (normally 12 months) and must submit annual evidence of continuing disability.

If an employee no longer meets the definition of disability and returns to work, the employee may again be insured under the group insurance contract on a premium-paying basis as long as the employee meets the contract's eligibility requirements. If for any reason the employee is not eligible for insurance under the group insurance contract, he or she can exercise the conversion privilege, discussed in the following section.

A small but growing trend is for disabled employees to continue as eligible employees under a group insurance contract, with the employer paying the periodic cost of their coverage just as if they were active employees. At the termination of the contract, the insurance company has no responsibility to continue coverage unless a disabled employee is eligible, elects to convert coverage, and pays any required premiums. However, depending on the provisions of the group insurance plan, the employer may have a legal responsibility to continue coverage on disabled employees in some manner.

Conversion
All group term life insurance contracts covering employees contain a conversion privilege that gives any employee whose group coverage ceases the right to convert to an individual insurance policy. The terms of the conversion privilege vary, depending on the reason for termination of coverage under the group contract. The most generous conversion rights are available to those employees who either have terminated employment or no longer fall into one of the eligible classifications still covered by the master contract. These employees have the right to purchase an individual life insurance policy from the insurance company without evidence of insurability, but it is often one without accidental death or dismemberment or other supplementary benefits. However, this right is subject to the following conditions:

- The employee must apply for conversion within 31 days after termination of employment or membership in an eligible classification. During this 31-day period, the employee's death benefit is equal to the amount of life insurance that is available under the conversion privilege, even if the employee does not apply for conversion. Disability and supplementary benefits are not extended during this period unless they are also subject to conversion. The premium for the individual policy must accompany the conversion application, and coverage is effective at the end of the conversion period.

- The individual policy selected by the employee generally may be any form, except term insurance, that the insurance company customarily issues at the age and amount applied for. Some insurance companies also make term insurance coverage available, and a few states require that employees be allowed to purchase term insurance coverage for a limited time (such as one year), after which an employee must convert to a cash-value form of coverage.

- The face amount of the individual policy may not exceed the amount of life insurance that terminated under the group insurance contract.

- The premium for the individual policy is determined using the insurance company's current rate applicable to the type and amount of the individual policy for the employee's attained age on the date of conversion and for the class of risk to which the employee belongs. Although no extra premium may be charged for reasons of health, an extra premium may be charged for any other hazards considered in an insurance company's rate structure, such as occupation or avocation.

It is estimated that only 1 percent to 2 percent of eligible employees actually take advantage of the conversion privilege. Several reasons account for this. Many employees obtain coverage with new employers; others are discouraged by the high cost of the permanent insurance to which they must convert. Still others, if they are insurable at standard rates, may find coverage at a lower cost with other insurers and be able to purchase supplementary coverage (such as disability benefits) that are not available under conversion policies. In addition, insurance companies have not actively encouraged group conversions because those who convert tend to be the poorer risks. Finally, because some employers are faced with conversion charges as a result of experience rating, they are also unlikely to encourage conversion.

There is a more restrictive conversion privilege if an employee's coverage is terminated because the master contract is terminated for all employees or is amended to eliminate eligible classifications. Under these circumstances, the employee is given a conversion right only if he or she was insured under the contract for a period of time (generally five years) immediately preceding the date on which coverage was terminated. In addition, the amount of insurance that can be converted is limited to the lesser of (1) $2,000 or (2) the amount of the employee's life insurance under the contract at the date of termination.

Portability of Term Coverage
A few, but an increasing number of, insurers issue contracts with a portability provision that allows employees whose coverage terminates to continue coverage at group rates in much the same manner as is found in voluntary employee-pay-all plans. The rates are age-based and will continue to increase as an insured person ages. Depending on the insurance company, the experience of this class of business may or may not be charged back to the former employer when future renewal rates are determined.

Accelerated Benefits
Over the last several years, many insurers have introduced an accelerated benefits provision in their individual life insurance products. Under such a provision, an insured is entitled to receive a portion of his or her death benefit while still living if one or more of the following events apply:
(1) the diagnosis of a terminal illness that is expected to result in death within 6 to 12 months;
(2) the occurrence of a specified catastrophic illness, such as AIDS, a stroke, or Alzheimer's Disease; or
(3) the incurring of nursing home and possibly other long-term care expenses. The categories of triggering events and the specific definitions of each vary among insurers.

What becomes popular in the individual marketplace often starts to show up in the group insurance marketplace. Such is the case with accelerated benefits, which are now offered by most group insurers. In fact, many group insurers make accelerated death benefits a part of their standard group term coverage unless an employer does not want the benefit provided.

Most group insurers allow accelerated benefits for terminal illnesses only. Some insurers use a life expectancy of 6 months or less; most use a life expectancy of 12 months or less. In either case, a doctor must certify the life expectancy.

The amount of the accelerated benefit is expressed as a percentage of the basic life insurance coverage and may range from 25 percent to 100 percent. In addition, most insurers limit the maximum benefit to a specified dollar amount that may vary from $25,000 to $250,000. Any amount not accelerated is paid to the beneficiary upon the insured's death.

There are no limitations on how the accelerated benefit can be used. It might be used to pay medical expenses and nursing home care not covered by other insurance, or it could even be used to prepay funeral expenses.

Although some insurers make no charge for the inclusion of an accelerated death benefit, most do levy some type of charge. In some cases, this may be a higher premium levied on the policyowner. In other cases, any accelerated death benefit paid will be reduced by an amount equal to the interest that could have been earned on the money over the next 6 to 12 months. Finally, a few insurers levy a modest transaction charge when an accelerated death benefit is taken.