CONTRACT PROVISIONS : Benefit Schedules

CONTRACT PROVISIONS
The provisions contained in group term life insurance contracts are more uniform than those found in other types of group insurance. Much of this uniformity is a result of the adoption by most states of the Group Life Insurance Standard Provisions Model Bill developed by the National Association of Insurance Commissioners (NAIC). This bill, coupled with the insurance industry's attempts at uniformity, has resulted in provisions that are virtually identical among insurance companies. While the following contract provisions represent the norm and are consistent with the practices of most insurance companies, some states may require slightly different provisions, and some companies may vary their contract provisions. In addition, negotiations between a policyholder and an insurance company may result in the modification of contract provisions.

Benefit Schedules
The purpose of the benefit schedule is twofold. It classifies the employees who are eligible for coverage, and it specifies the amount of life insurance that will be provided to the members of each class, thus minimizing adverse selection because the amount of coverage for individual employees is predetermined. A benefit schedule can be as simple as providing a single amount of life insurance for all employees or as complex as providing different amounts of insurance for different classes of employees. For individual employer groups, the most common benefit schedules are those in which the amount of life insurance is based on either earnings or position.

Earnings Schedules
Most group term life insurance plans use an earnings schedule under which the amount of life insurance is determined as a multiple (or percentage) of each each employee's earnings. For example, the amount of life insurance for each employee may be twice (200 percent of) the employee's annual earnings. Most plans use a multiple between one and two, but higher and lower multiples are occasionally used. The amount of insurance is often rounded to the next higher $1,000 and for underwriting purposes may be subject to a maximum benefit, such as $200,000. For purposes of the benefit schedule, an employee's earnings usually consist of base salary only and do not include additional compensation like overtime pay or bonuses.

An alternative to using a flat percentage of earnings is to use an actual schedule of earnings such as the one in Table 1. This type of schedule may be designed so that all employees receive an amount of coverage that is approximately equal to the same multiple of annual earnings or, as in this example, larger multiples with higher earnings. Benefit schedules usually provide for a change in the amount of an employee's coverage when the employee moves into a different classification, even if this does not occur on the policy anniversary date. For example, the schedule in Table 6-1 indicates that the amount of coverage for an employee earning $28,000 would increase from $40,000 to $75,000 if the employee received a $4,000 raise. Some schedules, however, specify that adjustments in amounts of coverage will be made only annually or on monthly premium due dates.


Table 1: Earnings Schedule

Position Schedules
Position schedules are similar to earnings schedules except that, as Table 6-2 shows, the amount of life insurance is based on an employee's position within the firm rather than on the employee's annual earnings.


Table 2: Position Schedule

Because individuals in high positions are often involved in designing the benefit schedule, underwriters are concerned that the benefits for these individuals be reasonable in relation to the overall plan benefits. Position schedules may also pose problems in meeting nondiscrimination rules if excessively large amounts of coverage are provided to persons in high positions.

Even though position schedules are often used when annual earnings can be easily determined, they are particularly useful when it is difficult to determine an employee's annual income. This is the situation when income is materially affected by such factors as commissions earned, number of hours worked, or bonuses that are based on either the employee's performance or the firm's profits.

Flat-Benefit Schedules
Under flat-benefit schedules, the same amount of life insurance is provided for all employees regardless of salary or position. This type of benefit schedule is commonly used in group insurance plans covering hourly paid employees, particularly when benefits are negotiated with a union. In most cases, the amount of life insurance under a flat-benefit schedule is relatively small, such as $10,000 or $20,000. When an employer desires to provide only a minimum amount of life insurance for all employees, a flat-benefit schedule is often used.

Combination Benefit Schedules
It is not unusual for employers to have benefit schedules that incorporate elements from several of the various types previously discussed. While there are numerous possible combinations, a common benefit schedule of this type provides salaried employees with an amount of insurance that is determined by a multiple of their annual earnings and hourly employees with a flat amount of life insurance.

Reduction in Benefits
It is common for a group life insurance plan to provide for a reduction in benefits for active employees who reach a certain age, commonly 65 to 70. Such a reduction, which is due to the high cost of providing benefits for older employees, is specified in the benefit schedule of a plan. Any reduction in the amount of life insurance for active employees is subject to the provisions of the Age Discrimination in Employment Act.

Benefit reductions fall into three categories:
(1) a reduction to a flat amount of insurance;
(2) a percentage reduction, such as to 65 percent of the amount of insurance that was previously provided; or
(3) a gradual reduction over a period of years (for example, a 10 percent reduction in coverage each year until a minimum benefit amount is reached).