GROUP UNIVERSAL LIFE INSURANCE : Employee Options at Retirement and Termination, Enrollment and Administration, Taxation

Employee Options at Retirement and Termination
Several options are available to the retiring employee. First, the employee can continue the group insurance coverage as if an active employee. However, if premium payments are continued, the employee is billed by the insurance company, probably on a quarterly basis. Because of the direct billing, the employee may be subject to a higher monthly expense charge. Second, the employee can terminate the coverage and completely withdraw his or her accumulated cash value. Third, the employee can elect one of the policy settlement options for the liquidation of cash value in the form of annuity income. Finally, some insurers allow the retiring employee to decrease the amount of pure insurance so that the cash value is adequate to keep the policy in force without any more premium payments. In effect, the employee then has a paid-up policy.

The same options are generally available to an employee who terminates employment prior to retirement. In contrast to most other types of group insurance arrangements, the continuation of coverage does not involve a conversion and the accompanying conversion charge; rather, the employee usually remains in the same group. This ability to continue group coverage after termination of employment is commonly referred to as portability. If former employees who continue coverage have higher mortality rates, this is reflected in the mortality charge for the entire group. However, at least one insurer places terminated employees into a separate group consisting of terminated employees from all plans. These persons are subject to a mortality charge based solely on the experience of this group. Thus, any higher mortality due to adverse selection is not shared by the actively working employees.

If the employer terminates the group insurance arrangement, some insurance companies keep the group coverage in force on a direct-bill basis, even if the coverage has been replaced with another insurer. Other insurance companies continue the group coverage only if the employer has not replaced the plan. If replacement occurs, the insurance company terminates the pure insurance amount and either gives the cash value to participants or transfers it to the trustee of the new plan.

Enrollment and Administration
Variations exist in the method by which employees are enrolled in group universal life insurance plans. Some early plans used agents who were compensated in the form of commissions or fees, but several insurance companies have dropped this practice. The actual enrollment is typically done by the employer with materials the insurance company provides. However, salaried or commissioned representatives of the insurer usually meet with the employees in group meetings to explain the plan.

The employer's main administrative function is to process the payroll deductions associated with a plan. As previously mentioned, employee flexibility may be somewhat limited to minimize the costs of numerous changes in payroll deductions.

The insurance company or a third-party administrator performs other administrative functions, including providing employees with annual statements about their transactions and cash-value accumulation under the plan. Toll-free telephone lines are often maintained to provide information and advice to employees.

Taxation
Group universal life insurance products are not designed to be policies of insurance under Section 79. In addition, each employee pays the full cost of his or her coverage. Therefore, the tax treatment is the same to employees as if they had purchased a universal life insurance policy in the individual insurance marketplace.