GROUP UNIVERSAL LIFE INSURANCE : General Nature

GROUP UNIVERSAL LIFE INSURANCE
Beginning in the mid-1980s, many large writers of group insurance started to sell group universal life insurance, a trend that was greeted with much interest by insurers, employers, and even employees. This interest seems to stem primarily from the following five factors:

1. The success of universal life insurance in the individual marketplace.

2. Tax legislation that made employer-provided term life insurance in excess of $50,000 taxable after retirement.

3. The clarification of the tax treatment of universal life insurance. For the first few years after the introduction of universal life insurance, there was concern that the Internal Revenue Service (IRS) would not grant it the same favorable tax treatment that was granted to traditional cash-value life insurance policies. There was speculation that the interest paid on the cash value might become subject to taxation and also that the death benefit would be considered taxable income for the beneficiary. For the most part these fears were laid to rest by tax legislation, as long as a universal life insurance policy meets certain prescribed guidelines. Therefore, the cash value of a universal life insurance policy accumulates tax free, and death benefits are free of income taxation.

4. The desire of employers to contain employee benefit costs. Little needs to be said about the attempts of employers to minimize the costs of their employee benefit plans. Group universal life insurance plans can make life insurance available to employees with little cost to the employer.

5. Less favorable tax treatment for formerly popular products for prefunding postretirement life insurance, such as retired-lives reserves.

Group universal life insurance products are being marketed primarily as supplemental life insurance plans, either to replace existing supplemental group term life insurance plans or as additional supplemental plans. Some insurers are promoting them as a way of providing the basic life insurance plan of an employee. Marketing efforts tout group universal life insurance as having the following advantages to the employer:

- No direct costs other than those associated with payroll deductions and possibly enrollment, because the entire premium cost is borne by the employee. In this sense, group universal life insurance plans are much like the payroll-deduction-funded plans

- No Employee Retirement Income Security Act (ERISA) filing and reporting requirement as long as the master contract is issued to a trust and as long as there are no employer contributions for the cost of coverage. The current products are marketed through multiple-employer trusts, with the trust being the policyholder.

- The ability of employees to continue coverage into retirement, alleviating pressure for the employer to provide postretirement life insurance benefits.

The following advantages are being claimed for employees:

- The availability of a popular life insurance product at group rates

- The opportunity to continue insurance coverage after retirement, possibly without any postretirement contributions

- Flexibility in designing coverage to best meet the needs of the individual employee

The current plans being marketed are still evolving, and differences do exist among the plans being offered by competing insurance companies. Because of the flexibility given to policyholders, the administrative aspects of a group universal plan are formidable, and most insurers originally designed their plans only for employers with a large number of employees, usually at least 1,000. However, some insurers that write the product now make it available for as few as 50 employees or less.

Skeptics, including employees of some insurance companies offering group universal life coverage, wonder if the administrative problems can be handled so that coverage can be offered at a cost significantly lower than what is found in the individual marketplace. In raising this question, skeptics point out the administrative problems and costs that have arisen when universal life insurance has been included in payroll-deduction individual insurance plans. In addition, the highly competitive market for individual universal life insurance has resulted in rates with extremely low margins for contributions to surplus. These drawbacks, coupled with the lack of employer contributions, make savings to employees through the group insurance approach less likely than for many other types of insurance. Other critics point out that the popularity of universal life insurance in the individual marketplace decreased as interest rates have dropped over the last few years. Nevertheless, plans that are installed are usually well received by employees, and participation generally meets or exceeds expectations.

In 1998, universal life insurance accounted for about 6.5 percent of group life insurance certificates in force, up from 2 percent in 1995.[1]

General Nature
Group universal life insurance is a flexible-premium policy that, unlike traditional cash-value life insurance, divides the term insurance protection and the cash-value accumulation into separate and distinct components. The employee is required to pay a specified initial premium, from which a charge is subtracted for one month's mortality. This mortality charge in effect is used to purchase the required amount of term insurance (often referred to as pure insurance or the amount at risk) at a cost based on the insured's current age. Under some policies, an additional deduction is made for expenses. The balance of the initial premium becomes the initial cash value of the policy, which, when credited with interest, becomes the cash value at the end of the period. The process continues in succeeding periods. New premiums are added to the cash value, charges are made for expenses and mortality, and interest is credited to the remaining cash value. Employees receive periodic disclosure statements showing all charges made for the period, as well as any interest earnings.

Group universal life insurance offers an employee considerable flexibility to meet several life-cycle financial needs with a single type of insurance coverage. The death benefit can be increased because of marriage, the birth of a child or an increase in income. The death benefit can be reduced later when the need for life insurance decreases. Cash withdrawals can be made for the down payment on a home or to pay college tuition. Premium payments can be reduced during those periods when a young family has pressing financial needs. As financial circumstances improve, premiums can be increased so that an adequate retirement fund can be accumulated. The usual settlement options found in traditional cash-value life insurance are available, so an employee can periodically elect to liquidate the cash accumulation as a source of retirement income.