CONTINUATION OF GROUP TERM INSURANCE

Most postretirement life insurance coverage consists of the continuation of group term insurance. This requires the employer to make important decisions regarding the amount of coverage to be continued and the method of paying for the continued coverage. Although the full amount of coverage prior to retirement may be continued, the high cost of group term life insurance coverage for older employees frequently results in a reduction in the amount of coverage. In some cases, employees are given a flat amount of coverage (such as $2,000 or $5,000); in other cases, employees are given a percentage (such as 50 percent) of the amount of coverage they had on the date of retirement.

Current Revenue Funding
The cost of providing postretirement life insurance is usually paid from current revenue, with each periodic premium the insurance company receives based on the lives of all employees covered, both active and retired. Because retired employees have no salaries or wages from which payroll deductions can be made, most postretirement life insurance coverage is noncontributory.

The tax implications of providing postretirement group term insurance on a current-revenue basis are the same for both the employer and the employee.

Retired-Lives Reserve To Continue Coverage
In the late 1970s and early 1980s, increasing interest was shown in prefunding the cost of postretirement group term insurance coverage through retired-lives-reserve arrangements. Much of this interest stemmed from Internal Revenue Service Section 79 regulations that made previously popular products less attractive. The concept was not new; retired-lives reserves, while not extensively used prior to that time, had been in existence for many years, primarily for very large employers. However, the trend in the 1970s was to establish them for smaller employers because the tax laws allowed the plans to be designed so that they often provided significant benefits to the firm's owners or key employees. Because the Tax Reform Act of 1984 imposed more stringent requirements on retired-lives reserves and because of the availability of newer products for postretirement coverage, there is little interest in establishing new plans. Nevertheless, plans still exist, primarily in heavily unionized industries and usually for employers with 2,000 to 5,000 employees. In addition, other plans still exist for employees and retirees previously covered under them, but other arrangements are used for newer employees.

A retired-lives reserve is best defined as a fund established during employees' working years to pay all or a part of the cost of their group term insurance after retirement. The fund may be established and maintained through a trust or with an insurance company. If properly designed, a retired lives reserve (1) will enable an employer to make currently tax-deductible contributions to the fund during employees' working years and (2) will not result in any taxable income to employees before retirement. However, current deductions may be taken only for prefunding coverage that will be received tax free by retired employees under Section 79. This amount is generally $50,000 but may be higher for certain employees, subject to a grandfather clause. In addition, contributions on behalf of key employees cannot be deducted if the plan is discriminatory under Section 79.

At retirement, the assets of the fund can be used to pay the cost of maintaining the postretirement coverage. If assets are withdrawn from a trust, there is the possibility of the fund's being inadequate in the long run because of higher premiums and/or shorter life expectancies than anticipated. However, insurance company products typically assume the adverse mortality risk and guarantee that the fund will be adequate to maintain the promised benefits as long as the prescribed contributions have been deposited with the insurer.

As long as an employee has no rights in a retired-lives reserve except to receive postretirement group term insurance coverage until his or her death, the employee will incur no income taxation as a result of either employer contributions to the reserve or investment earnings on the reserve. In addition, up to $50,000 can be received income-tax free by beneficiaries.

In those instances where death benefits are paid directly from trust assets, the tax consequences to the employee are the same as if death benefits were provided through group term insurance contracts, except that death proceeds will represent taxable income to the beneficiary

Group Life Insurance—Lifetime Coverage (Employee Benefits)

OBJECTIVES

Group term life insurance plans were traditionally designed to provide employees with preretirement life insurance coverage. At retirement, an employee was faced with the decision of whether to let coverage terminate or to convert to an individual policy at an extremely high premium rate. In recent years, however, an increasing number of group life insurance plans have been designed to provide postretirement as well as preretirement life insurance coverage. In some cases, this has been accomplished by continuing group term insurance coverage, often at a reduced amount, after retirement. In other cases, this has been achieved by means of life insurance that provides permanent benefits funded during employees' working years.

The popularity of various approaches for providing postretirement life insurance coverage has changed over time, primarily because of changes in tax laws. Older and once popular products such as group paid-up insurance and group ordinary insurance are no longer written. Newer products like group universal life insurance and group variable universal life insurance have come on the scene and grown in popularity. Four approaches that are currently used:

- Continuation of group term insurance

- Group universal life insurance

- Group variable universal life insurance

- Group term carve-outs

Taxation of Proceeds

Taxation of Proceeds
In most instances, Code Section 101 provides that the death proceeds under a group term insurance contract do not result in any taxable income to the beneficiary if they are paid in a lump sum. If the proceeds are payable in installments over more than one taxable year, only the interest earnings attributable to the proceeds are included in the beneficiary's income for tax purposes.

Under certain circumstances, the proceeds are not exempt from income taxation if the coverage was transferred (either in whole or in part) for a valuable consideration. Such a situation arises when the stockholder-employees of a corporation name each other as beneficiaries under their group term insurance coverage as a method of funding a buy-sell agreement. The mutual agreement to name each other as beneficiaries is the valuable consideration. Under these circumstances, any proceeds paid to a beneficiary constitute ordinary income to the extent that the proceeds exceed the beneficiary's tax basis, as determined by the Internal Revenue Code.

In many cases, benefits paid by an employer to employees or their beneficiaries from the firm's assets receive the same tax treatment as benefits provided under an insurance contract. This is not true for death benefits. If they are provided other than through an insurance contract, the amount of the proceeds represents taxable income to the beneficiary. For this reason, employers are less likely to use alternative funding arrangements for death benefits than for disability and medical expense benefits.

Under Code Section 2042, the proceeds of a group term insurance contract, even if paid to a named beneficiary, are included in an employee's gross estate for federal estate tax purposes as long as the employee possessed incidents of ownership in the coverage at the time of death. However, no estate tax is levied on any amounts, including life insurance proceeds, left to a surviving spouse. In addition, taxable estates of $675,000 or less are generally free of estate taxation regardless of the beneficiary.

When an estate would otherwise be subject to estate taxation, an employee may remove the proceeds of group term insurance from his or her taxable estate by absolutely assigning all incidents of ownership to another person, usually the beneficiary of the coverage. Incidents of ownership include the right to change the beneficiary, to terminate coverage, to assign coverage or, to exercise the conversion privilege. For this favorable treatment, however, the Internal Revenue Code requires that such an assignment be permissible under both the group term insurance master contract and the laws of the state having jurisdiction. The absolute assignment is usually in the form of a gift, which is not without its own tax implications. The amount of insurance is considered a gift made each year by the employee to the person to whom the absolute assignment was granted. Consequently, if the value of the gift is of sufficient size, federal gift taxes are payable.

The assignment of group term life insurance also results in the inclusion of some values in the employee's estate. If the employee dies within three years of making the assignment, the full amount of the proceeds are included in the employee's estate. If death occurs more than three years after the assignment is made, only the premiums paid within the three years prior to death are included in the employee's taxable estate. In the past, a problem arose if the employer changed group insurance carriers, thus requiring the employee to make a new assignment and again be subject to the three-year time limit. However, the IRS now considers this type of situation to be a continuation of the original assignment as long as the amount and provisions of the new coverage are essentially the same as those of the old coverage.

As of 1997, the tax treatment of accelerated death benefits was added to the Internal Revenue Code. If certain requirements are satisfied, benefits paid to persons who are either terminally or chronically ill will receive favorable tax treatment. Benefits received because of a terminal illness are treated as income-tax-free death benefits as long as a physician has certified that the insured has an illness or physical condition that can reasonably be expected to result in death within 24 months or less after the date of certification. If a group contract provides accelerated death benefits to other categories of individuals, benefits can also be received with favorable tax treatment if a person is chronically ill and the coverage qualifies as a long-term care insurance contract.

Treatment of Added Coverages
Supplemental life insurance can be written as either a separate contract or as part of the contract providing basic group term life insurance coverage. If it is a separate contract and if the supplemental group life insurance meets the conditions of qualifying as group term insurance under Section 79, the amount of coverage provided is added to all other group term insurance for purposes of calculating the Uniform Premium Table I cost. Any premiums the employee pays for the supplemental coverage are included in the deduction used to determine the final taxable income. In all other ways, supplemental life insurance is treated the same as group term insurance.

Many separate supplemental contracts are noncontributory, and the cost for each employee's coverage does not exceed the Table I cost. In this case, the supplemental contract does not qualify as group term life insurance under Section 79. As a result, the value of the coverage is not included in an employee's income.

When supplemental life insurance coverage is written in conjunction with a basic group life insurance plan, employers have the option of treating the supplemental coverage as a separate policy of insurance as long as the premiums are properly allocated among the two portions of the coverage. There is no advantage in treating the supplemental coverage as a separate policy if it would still qualify by itself as group term insurance under Section 79. However, this election minimizes taxable income to employees if the cost of the supplemental coverage is paid totally by the employees and all employees are charged rates at or below Table I rates.

Premiums paid for accidental death and dismemberment insurance are considered to be health insurance premiums rather than group term insurance premiums. However, as are group term life insurance premiums, these are deductible by the employer as an ordinary and necessary business expense. Benefits paid to an employee under the dismemberment portion of the coverage are treated as benefits received under a health insurance contract and are free of income taxation. Death benefits received under the coverage are treated like death benefits received under group term life insurance.

Employer contributions for dependent life insurance coverage are fully deductible by the employer as an ordinary and necessary business expense if the employee's overall compensation is reasonable. Employer contributions do not result in taxable income to an employee as long as the value of the benefit is de minimis. This means that the value is so small that it is administratively impractical for the employer to account for the cost on a per-person basis. Dependent coverage of $2,000 or less on any person falls into this category. If more than $2,000 of coverage is provided for any dependent from employer contributions, the cost of the entire amount of coverage for that dependent (as determined by Uniform Premium Table I rates) is considered taxable income to the employee.

Death benefits are free of income taxation and are not included in the dependent's taxable estate for estate tax purposes.

State Taxation
In most instances, state tax laws affecting group term insurance are similar to the federal laws. However, two major differences exist: In most states, the payment of group term insurance premiums by the employer does not result in any taxable income to the employee, even if the amount of coverage exceeds $50,000. In addition, death proceeds receive favorable tax treatment under the estate and inheritance tax laws of most states. Generally, the proceeds are at least partially, if not totally, exempt from such taxation.

TAXATION

TAXATION
A discussion of group term insurance is incomplete without an explanation of the tax laws affecting its use. While discussions of these laws are often limited to federal income and estate taxation, federal gift taxation and taxation by the states should also be considered.

Federal Taxation
The growth of group term life insurance has been greatly influenced by the favorable tax treatment afforded it under federal tax laws. This section is devoted to the effects of these tax laws on basic group term insurance and on coverages that may be added to a basic group term life insurance contract.

Deductibility of Premiums
In general, employer contributions for an employee's group term life insurance coverage are fully deductible by the employer under Code Section 162 as an ordinary and necessary business expense as long as the employee's overall compensation is reasonable. The reasonableness of compensation (which includes wages, salary, and other fringe benefits) is usually only a potential issue for the owners of small businesses or the stockholder-employees of closely held corporations. For income tax purposes, a firm may not deduct any compensation that the Internal Revenue Service (IRS) determines to be unreasonable. In addition, the Internal Revenue Code does not allow a firm to take an income tax deduction for contributions (1) that are made on behalf of sole proprietors or partners under any circumstances or (2) that are made on behalf of stockholders unless they are providing substantive services to the corporation. Finally, no deduction is allowed under Code Section 264 if the employer is named as beneficiary.

Contributions by any individual employee are considered payments for personal life insurance and are not deductible for income tax purposes by that employee. Thus, the amount of any payroll deductions authorized by an employee for group term insurance purposes is included in the employee's taxable income.

Employees' Income Tax Liability
In the absence of tax laws to the contrary, the amount of any compensation for which an employer receives an income tax deduction (including the payment of group insurance premiums) represents taxable income to the employee. However, Section 79 of the Internal Revenue Code gives favorable tax treatment to employer contributions for life insurance that qualifies as group term insurance.

Section 79 Requirements. To qualify as group term insurance under Section 79, life insurance must meet the following conditions:

- It must provide a death benefit excludable from federal income taxation.

- It must be given to a group of employees, defined to include all employees of an employer. If all employees are not covered, membership must be determined on the basis of age, marital status, or factors relating to employment.

- It must be provided under a policy carried directly or indirectly by the employer. A policy is defined to include a master contract or a group of individual policies. The term carried indirectly refers to those situations when the employer is not the policyholder but rather provides coverage to employees through master contracts issued to organizations such as negotiated trusteeships or multiple-employer welfare arrangements.

- The plan must be arranged to preclude individual selection of coverage amounts. However, it is acceptable to have alternative benefit schedules based on the amount an employee elects to contribute. Supplemental plans that give an employee a choice, such as either 1, 1½, or 2 times salary, are considered to fall within this category. An employee can be allowed to reject coverage in excess of $50,000 if he or she does not want any imputed income.

All life insurance that qualifies under Section 79 as group term insurance is considered to be a single plan of insurance, regardless of the number of insurance contracts used. For example, an employer might provide coverage for union employees under a negotiated trusteeship, coverage for other employees under an individual employer group insurance contract, and additional coverage for top executives under a group of individual life insurance policies. Under Section 79, these all constitute a single plan. This plan must be provided for at least ten full-time employees at some time during the calendar year. For purposes of meeting the "ten-life" requirement, employees who have not satisfied any required waiting periods may be counted as participants. Employees who have elected not to participate are also counted as participants—but only if they would not have been required to contribute to the cost of other benefits besides group term insurance if they had participated. As is described later, a plan with fewer than ten full-time employees may still qualify for favorable tax treatment under Section 79 if it meets more restrictive requirements.

Exceptions to Section 79. Even when all the previous requirements are met, there are some situations in which Section 79 does not apply. In some cases, different sections of the Internal Revenue Code provide alternative tax treatment. For example, when group term insurance is issued to the trustees of a qualified pension plan and is used to provide a death benefit under the plan, the full amount of any life insurance paid for by employer contributions results in taxable income to the employee.

There are three situations in which employer contributions for group term insurance do not result in taxable income to an employee, regardless of the amount of insurance: (1) if an employee has terminated employment because of disability, (2) if a qualified charity (as determined by the Internal Revenue Code) has been named as beneficiary for the entire year, or (3) if the employer has been named as beneficiary for the entire year.

Coverage for retired employees is subject to Section 79, and these persons are treated in the same manner as active employees. Thus, they have taxable income in any year in which the amount of coverage received exceeds $50,000. However, a grandfather clause to this rule stipulates that it does not apply to group term life insurance plans (or to comparable successor plans or plans of successor employers) in existence on January 1, 1984, for covered employees who (1) retired before 1984 or (2) were at least 55 years of age before 1984 and were employed by the employer any time during 1983. There is one exception to this grandfather clause; it does not apply to persons (either key or nonkey employees) retiring after 1986 if a plan is discriminatory.

General Tax Rules. Under Section 79, the cost of the first $50,000 of coverage is not taxed to the employee. Because all group term insurance provided by an employer that qualifies under Section 79 is considered to be one plan, this exclusion applies only once to each employee. For example, an employee who has $10,000 of coverage that is provided to all employees under one policy and $75,000 of coverage provided to executives under a separate insurance policy would have a single $50,000 exclusion. The cost of coverage in excess of $50,000, minus any employee contributions for the entire amount of coverage, represents taxable income to the employee. For purposes of Section 79, the cost of this excess coverage is determined by a government table called the Uniform Premium Table I (see Table 1). This table was revised in 1999 with significantly lower costs.


Table 1: Uniform Premium Table I

To calculate the cost of an employee's coverage for one month of protection under a group term insurance plan, the Uniform Premium Table I cost shown for the employee's age bracket (based on the employee's attained age at the end of the tax year) is multiplied by the number of thousands in excess of 50 of group term insurance on the employee. For example, if an employee aged 57 (whose Table I monthly cost is $.43 per $1,000 of coverage) is provided with $150,000 of group term insurance, the employee's monthly cost (assuming no employee contributions) is calculated as follows



The monthly costs are then totaled to obtain an annual cost. Assuming no change in the amount of coverage during the year, the annual cost is $43 × 12, or $516. Any employee contributions for the entire amount of coverage are deducted from the annual cost to determine the taxable income that an employee must report. If an employee contributes $.25 per month ($3 per year) per $1,000 of coverage, the employee's total annual contribution for $150,000 of coverage is $450. This reduces the amount reportable as taxable income from $516 to $66. Note that if the employee contribution is $.30 rather than $.25 per month, the annual employee contribution in this example is $540. Because $540 exceeds the Table I cost, there is no imputed income.

One final point is worthy of attention. The use of Uniform Premium Table I results in favorable tax treatment for the cost of group term insurance when the monthly costs in the table are lower than the actual cost of coverage in the marketplace. However, group term insurance coverage can often be purchased at a lower cost than Table I rates. There are some who argue that in these instances the actual cost of coverage can be used in place of the Table I cost for determining an employee's taxable income. From the standpoint of logic and consistency with the tax laws, this view makes sense. However, the regulations for Section 79 are very specific: Only Table I costs are to be used.

Nondiscrimination Rules. Any plan that qualifies as group term insurance under Section 79 is subject to nondiscrimination rules, and the $50,000 exclusion will not be available to key employees if a plan is discriminatory, defined as a plan that favors key employees in either eligibility or benefits. In addition, the value of the full amount of coverage for key employees, less their own contribution, will be considered taxable income, based on the greater of actual or Table I costs.

A key employee of a firm is defined as any person who at any time during the current plan year or the preceding four plan years is any of the following:

- An officer of the firm who earns from the firm more than 50 percent of the Internal Revenue Code limit on the amount of benefits payable by a defined-benefit plan. This amount (50 percent of $135,000, or $67,500, for 2000) is indexed annually. For purposes of this rule, the number of employees treated as officers is the greater of three employees or 10 percent of the firm's employees, subject to a maximum of 50. In applying the rule the following employees can be excluded: persons who work part time, persons who are under age 21, and persons with less than six months of service with the firm.

- One of the ten employees owning the largest interest in the firm and having an annual compensation from the firm of more than $30,000.

- An individual who owns more than 5 percent of the firm.

- An individual who owns more than 1 percent of the firm and who earns over $150,000 per year.

Note that the definition of key employee includes not only active employees but also retired employees who were key employees at the time of retirement or separation from service.

Eligibility requirements are not discriminatory if (1) at least 70 percent of all employees are eligible, (2) at least 85 percent of all employees who are participants are not key employees, (3) participants constitute a classification that the IRS determines is nondiscriminatory, or (4) the group term insurance plan is part of a cafeteria plan and Section 125 requirements are satisfied. For purposes of the 70 percent test, employees with less than three years' service, part-time employees, and seasonal employees may be excluded. Employees covered by collective-bargaining agreements may also be excluded if plan benefits were the subject of good-faith bargaining.

Benefits are not discriminatory if neither the type nor amount of benefits discriminates in favor of key employees. It is permissible to base benefits on a uniform percentage of salary.

Groups with Fewer than Ten Full-Time Employees. A group insurance plan that covers fewer than ten employees must satisfy an additional set of requirements before it is eligible for favorable tax treatment under Section 79. These rules predate the general nondiscrimination rules previously described, and it was assumed that the "under-ten" rules would be abolished when the new rules were adopted. However, that was not done, so smaller groups are subject to two separate and somewhat overlapping sets of rules. Again, note that Section 79 applies to an employer's overall plan of group insurance, not to separate group insurance contracts. For example, an employer providing group insurance coverage for its 50 hourly employees under one group insurance contract and for its six executives under a separate contract is considered to have a single plan covering 56 employees and thus is exempt from the "underten" requirements. While the stated purpose of the "under-ten" requirements is to preclude selection of coverage by individual employees, their effect is to prevent the group insurance plan from discriminating in favor of the owners or stockholder-employees of small businesses.

With some exceptions, plans covering fewer than ten employees must provide coverage for all full-time employees. For purposes of this requirement, employees who are not customarily employed for more than 20 hours in any one week or five months in any calendar year are considered part-time employees. It is permissible to exclude full-time employees from coverage under the following circumstances:

- The employee has reached age 65.

- The employee has not satisfied the plan's probationary period, which may not exceed six months.

- The employee has elected not to participate in the plan, but only if the employee would not have been required to contribute to the cost of other benefits besides group term life insurance if he or she had participated.

- The employee has not satisfied the evidence of insurability required under the plan. An employee's eligibility for insurance (or the amount of insurance on the employee's life) may be subject to evidence of insurability. However, this evidence of insurability must be determined solely on the basis of a medical questionnaire completed by the employee and not by a medical examination.

The amount of coverage must be a flat amount, a uniform percentage of compensation, or an amount based on different employee classifications. These employee classifications, which are referred to as coverage brackets in Section 79. The amount of coverage for each employee in any classification may be no greater than 2½ times the amount of coverage provided to each employee in the next lower classification. In addition, each employee in the lowest classification must be provided with an amount of coverage that is equal to at least 10 percent of the amount for each employee in the highest classification. There must also be a reasonable expectation that there will be at least one employee in each classification. The benefit schedule shown in Table 2 is unacceptable for two reasons. First, the amount of coverage provided for the hourly employees is only 5 percent of the amount of coverage provided for the president. Second, the amount of coverage for the supervisor is more than 2½ times the amount of coverage provided for the hourly employees. The benefit schedule in Table 3, however, is acceptable.



Table 2: Unacceptable Benefit Schedule


Table 3: Acceptable Benefit Schedule

If a group insurance plan that covers fewer than ten employees does not qualify for favorable tax treatment under Section 79, any premiums paid by the employer for such coverage represent taxable income to the employees. The employer, however, still receives an income tax deduction for any premiums paid on behalf of the employees as long as overall compensation is reasonable.

Dependent Life Insurance

Dependent Life Insurance
Some group life insurance contracts provide insurance coverage on the lives of employees' dependents. Dependent life insurance has been viewed as a method of giving the employee resources to meet the funeral and burial expenses associated with a dependent's death. Consequently, the employee is automatically the beneficiary. The employee also elects and pays for this coverage if it is contributory. Coverage for dependents is almost always limited to employees who are themselves covered under the group contract; even if an employee's coverage is contributory, the employee must elect coverage for himself or herself in order to be eligible to elect dependent coverage.

For purposes of dependent life insurance coverage, dependents are usually defined as an employee's spouse who is not legally separated from the employee and an employee's unmarried dependent children (including stepchildren and adopted children) who are older than 14 days of age and younger than some specified age, commonly 19 or 21. To prevent adverse selection, an employee usually cannot select coverage for individual dependents. A few policies do allow an employee to elect coverage for the spouse only or for children only. If dependent coverage is selected, all dependents fitting the definition are insured. When dependent coverage is in effect for an employee, any new eligible dependents are automatically insured.

The amount of coverage for each dependent is usually quite modest. Some states limit the maximum amount of life insurance that can be written, and a few states actually prohibit writing any coverage on dependents. Employer contributions used to purchase more than $2,000 of coverage for each dependent are recognized as income to the employee for purposes of federal taxation. However, amounts in excess of $2,000 may be purchased with employee contributions without adverse tax consequences. In some cases, the same amount of coverage is provided for all dependents; in other cases, a larger amount is provided for the spouse than for the children. It is also not unusual for the amount of coverage for children to be less until the children attain some specified age, such as six months. Tables 1 and 2 are examples of benefit schedules under dependent coverage.


Table 1: Benefit Schedule (Same Amounts for All Dependents)


Table 2: Benefit Schedule for Dependents (Varied Amounts)

A single premium applies to the dependent coverage for each employee and is unrelated to the number of dependents. In some cases, the premium may vary, depending on the age of the employee (but not the dependents), but more commonly it is the same amount for all employees regardless of age. Dependent coverage usually contains a conversion privilege that applies only to the coverage on the spouse. However, some states require that the conversion privilege apply to the coverage on all dependents. Assignment is almost never permitted, and no waiver of premium is available if a dependent becomes disabled. However, if the basic life insurance contract contains a waiver-of-premium provision applicable to the employee, the employee's disability sometimes will result in a waiver of premium for the dependent coverage. A provision similar to the actively-at-work provision pertaining to employees is often included for dependents. It specifies that dependents are not covered when otherwise eligible if they are confined in a hospital (except for newborn children, who are covered after 14 days). Coverage commences when the dependent is discharged from the hospital.

Accidental Death and Dismemberment Insurance

Accidental Death and Dismemberment Insurance
Many group life insurance contracts contain an accidental death and dismemberment (AD&D) provision that supplies additional benefits if an employee dies accidentally or suffers certain types of injuries. Traditionally, this group coverage was available only as a rider to a group life insurance contract. Now, however, it is common to find these benefits in separate group insurance contracts in which coverage is usually contributory on the part of employees. Such contracts are referred to as voluntary accidental death and dismemberment insurance. There are also separate contracts, called carve-outs, that employers can purchase to replace the employer-paid coverage available from their group life insurance carrier. These contracts are used because of more favorable provisions and/or cost savings.

Traditional Coverage
Under the traditional form of accidental death and dismemberment insurance, an employee eligible for group life insurance coverage (and electing the life insurance coverage if it is contributory) automatically receives accidental death and dismemberment coverage if the employer has added it or purchased an AD&D carve-out. A few plans impose a probationary period, such as six months, before coverage begins. Under the typical accidental death and dismemberment rider, the insurance company pays an additional amount of insurance that is equal to the amount of coverage under the basic group life insurance contract (referred to as the principal sum) if an employee dies as a result of accidental bodily injuries while he or she is covered under the policy. It is specified that death must occur within a certain time, often 90 days, following the date that injuries are sustained, but some courts have ruled this time period to be invalid and have required insurance companies to pay claims when longer periods have been involved. In addition to an accidental death benefit, the benefit schedule shown in Table 1 is provided for certain specific types of injuries.


Table 1: Position Schedule Based on Type of Injury

In some cases, the accidental death and dismemberment rider is written to provide the same benefits for any accident covered under the contract. However, it is not unusual to have a higher level of benefits for accidents that occur while the employee is traveling on business for the employer. These larger travel benefits may apply to death benefits only. They may also be limited to accidents that occur, for example, when the employee is occupying (or entering or alighting from or struck by) a public conveyance and possibly a company-owned or personally owned vehicle. Table 2 is an example of a benefit schedule reflecting some of these variations.



Table 2: Position Schedule Based on Type of Loss

Death benefits are paid in accordance with the beneficiary provision of the group life insurance contract, and dismemberment benefits are paid to the employee. Coverage is usually written to cover both occupational and nonoccupational accidents. However, when employees are in hazardous occupations, coverage may apply only to nonoccupational accidents, in which case employees would still have workers' compensation coverage for any occupational accidents.

Some insurers also pay an additional benefit if an insured suffers a covered loss as the result of an automobile accident, as long as the insured is wearing a properly fastened seat belt and is not under the influence of alcohol. Other insurers may include additional educational benefits for dependent children. For competitive reasons, some insurers make a number of additional benefits available for purchase by the employer to cover an employee who is injured or killed in a covered accident. Some additional benefits include the following:

- A benefit to help cover the costs an employer incurs to make worksite adaptations necessitated by the Americans with Disabilities Act to accommodate a disabled employee

- A benefit to return an injured employee or the body of a deceased employee home if death or disability occurs elsewhere

- Rehabilitation benefits for an injured employee

- Monthly income benefits for an employee who is permanently disabled

- Monthly income benefits for an employee who becomes a paraplegic or quadriplegic, and

- Monthly income benefits for an employee who is in a coma

Coverage is usually not subject to a conversion privilege. However, an increasing number of insurers are allowing conversion, but possibly only up to specified limits that are lower than the former group coverage. When life insurance coverage continues after retirement, accidental death and dismemberment benefits normally cease. As with life insurance coverage, however, this coverage may be continued during temporary periods of unemployment. In contrast to the group term insurance policy to which it is attached, group accidental death and dismemberment insurance contains some exclusions. These include losses resulting from the following:

- Suicide at any time (It is interesting to note that, except for a few multiple-employer trusts, group term insurance does not contain a suicide provision.)

- Disease or bodily or mental infirmity or medical or surgical treatment thereof

- Ptomaines or any infection other than one occurring simultaneously with and through an accidental cut or wound

- War

- Travel or flight in any type of aircraft as a pilot, student pilot, or officer or member of the crew (There is a trend toward eliminating this exclusion, particularly when coverage is written on large groups)

Voluntary Coverage
The provisions of voluntary group accidental death and dismemberment insurance are practically identical to those in a group life insurance contract with an accidental death and dismemberment insurance rider. However, there are a few differences. Voluntary plans usually require that the employee pay the entire cost of coverage, and they virtually always provide both occupational and nonoccupational coverage. Subject to limitations, the employee may select the amount of coverage desired, and the maximum amount of coverage available tends to be larger than when coverage is provided through a rider. For example, one plan allows coverage to be purchased at the following levels: $50,000, $75,000, $100,000, $200,000, $300,000, or $500,000, as long as the amount selected does not exceed ten times annual salary. The amount of coverage often decreases after age 65 or 70, just as the amount of traditional coverage decreases when it is a function of a life insurance benefit that is decreased at older ages.

Yet another difference is the frequent use in voluntary plans of a common accident provision, whereby the amount payable by the insurance company is limited to a stipulated maximum for all employees killed or injured in any single accident. If this exceeds the sum of the benefits otherwise payable for each employee, benefits are prorated.

A final difference is that some plans allow an employee to purchase coverage on dependents. For example, under one plan the coverage on a spouse is equal to 40 percent of the coverage on the employee, and coverage on each child is 10 percent of the employee's coverage. When dependent coverage is purchased, some insurers make a variety of optional benefits available. Some of these include the following:

- Education benefits for children enrolled in a university, college, or trade school following an employee's death

- Additional dismemberment benefits for children who periodically need to be refitted with prosthetic devices as they grow

- Day care expense coverage for children if the day care is necessitated by the death of a parent

- Benefits to pay the cost of a family's COBRA coverage after the death of an employee

- An additional benefit to the children if both parents are killed in the same accident

ADDED COVERAGES : Supplemental Life Insurance

ADDED COVERAGES
Group term life insurance contracts often provide additional insurance benefits. Historically, these have been added through the use of riders, but many insurers now incorporate some or all of these benefits into their basic term insurance contracts. The most common types of these benefits, which are also forms of group term insurance, are
(1) supplemental life insurance,
(2) accidental death and dismemberment insurance, and
(3) dependent life insurance. These added benefits may be provided for all employees insured under the basic group term contract or may be limited to certain classes of employees. With the exception of dependent life insurance, these coverages may also be written as separate contracts.

Supplemental Life Insurance
The majority of group life insurance plans enable all or certain classes of employees to purchase additional amounts of life insurance. Generally, the employer provides a basic amount of life insurance to all eligible employees on a noncontributory basis. This is commonly a flat amount of coverage or a multiple of annual earnings. The supplemental coverage is contributory and may be either incorporated into the basic group life insurance contract or contained in a separate contract. The latter method tends to be more common when the supplemental coverage is available only to a select group of employees. The employee may pay the entire cost of the supplemental coverage; however, state laws that require employer contributions or insurance company underwriting practices often result in the employer's paying a portion of the cost. It is not unusual for there to be two sets of rates—one for smokers and another for nonsmokers.

The amount of supplemental coverage available is specified in a benefit schedule. Under some plans, an employee must purchase the full amount of coverage; under other plans, an employee may purchase a portion of the coverage. Tables 1 and 2 are two examples of benefit schedules for a basic-plus-supplemental life insurance plan.


Table 1: Benefit Schedule (Flat Amount)


Table 2: Benefit Schedule (Multiple of Annual Earnings)

Giving employees the right to choose their benefit amounts leads to adverse selection. As a result, more stringent underwriting requirements are usually associated with supplemental coverage. These often include requiring individual evidence of insurability, except possibly when the additional amount of coverage is modest. In addition, higher rates may be charged for supplemental insurance than for basic coverage.

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.

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.

CONTRACT PROVISIONS : Eligibility

Eligibility
Group insurance contracts are very precise in their definition of what constitutes an eligible person for coverage purposes. In general, an employee must be in a covered classification, work full-time, and be actively at work. In addition, any requirements concerning probationary periods, insurability, or premium contributions must be satisfied.

Covered Classifications
All group insurance contracts specify that an employee must fall into one of the classifications contained in the benefit schedule. While these classifications may be broad enough to include all employees of the organization, they may also be so limited as to exclude many employees from coverage. In some cases, these excluded employees may have coverage through a negotiated trusteeship or under other group insurance contracts provided by the employer; in other cases, they may have no coverage because the employer wishes to limit benefits to certain groups of employees. No employee may be in more than one classification, and the responsibility for determining the appropriate classification for each employee falls on the policyholder.

Full-Time Employment
Most group insurance contracts limit eligibility to full-time employees. A full-time employee is generally defined as one who works no fewer than the number of hours in the normal work week established by the employer, which must be at least 30 hours. Subject to insurance company underwriting practices, an employer can provide coverage for part-time employees. When this is done, part-time is generally defined as less than full-time but more than some minimum number of hours per week. Part-time employees may be subject to more stringent eligibility requirements. For example, full-time hourly paid employees may be provided with $20,000 of life insurance immediately on employment, while part-time employees may be provided with only $10,000 of life insurance and may be subject to a probationary period.

Actively-at-Work Provision
Most group insurance contracts contain an actively-at-work provision, whereby an employee is not eligible for coverage if absent from work because of sickness, injury, or other reasons on the otherwise effective date of coverage under the contract. Coverage will commence when the employee returns to work. This provision is often waived for employers with a large number of employees when coverage is transferred from one insurance company to another and the employees involved have been insured under the previous insurance company's contract.

Probationary Periods
Group insurance contracts may contain probationary periods that must be satisfied before an employee is eligible for coverage. When a probationary period exists, it rarely exceeds six months, and an employee is eligible for coverage on either the first day after the probationary period or on the first day of the month following the end of the probationary period.

Insurability
While most group insurance contracts are issued without individual evidence of insurability, in some instances underwriting practices require evidence of insurability. This commonly occurs when an employee fails to elect coverage under a contributory plan and later wants coverage or when an employee is eligible for a large amount of coverage. In these cases, an employee is not eligible for coverage until he or she has submitted the proper evidence of insurability and the insurance company has determined that the evidence is satisfactory.

Premium Contribution
If a group insurance plan is contributory, an employee is not eligible for coverage until the policyholder has been given the proper authorization for payroll deductions. If this is done before the employee otherwise becomes eligible, coverage commences on the eligibility date. During a period of 31 days following the eligibility date, coverage begins when the policyholder receives the employee's authorization. If the authorization is not received within the 31 days, the employee must furnish evidence of insurability at his or her own expense to obtain coverage. Evidence of insurability is also required if an employee drops coverage under a contributory plan and wishes to regain coverage at a future date.