GROUP UNIVERSAL LIFE INSURANCE : Loans and Withdrawals, Dependent Coverage, Accidental Death and Waiver of Premium

Loans and Withdrawals
Employees are allowed to make loans and withdrawals from their accumulated cash values, but for administrative reasons the frequency of loans and withdrawals may be limited. There are also minimum loan and withdrawal amounts, such as $250 or $500. In addition, an employee is usually required to leave a minimum balance in the cash-value account sufficient to pay mortality and expense charges for some time period, possibly as long as one year. If an option A death benefit is in effect, the amount of the pure insurance is increased by the amount of the loan or withdrawal so that the total death benefit remains the same. With an option B death benefit, the amount of the total death benefit is decreased.

The interest rate charged on policy loans is usually pegged to some index, such as Moody's composite bond yield index. In addition, the interest rate applied to an amount of the cash value equal to the policy loan is reduced. This reduced interest rate may be the guaranteed policy minimum or may also be based on some index; for example, the rate may be 2 percent less than Moody's composite bond yield.

An employee can withdraw his or her entire cash-value accumulation and terminate coverage. Total withdrawals are subject to a surrender charge during early policy years. The charge decreases with policy duration and is usually in addition to any transaction charge that might also be levied.

Dependent Coverage
Most products allow an employee to purchase a rider that provides term insurance coverage on his or her spouse and children. For example, one insurance company allows an employee to elect spousal coverage of $10,000 to $50,000 in $10,000 increments and coverage on children in the amount of either $5,000 or $10,000. Other insurers make varying amounts available.

Some insurance companies allow separate universal life insurance coverage to be elected, but usually only for the spouse. In such cases, the coverage is provided under a separate group insurance certificate rather than a rider.

Accidental Death and Waiver of Premium
A group universal life insurance plan may provide accidental death benefits and a disability waiver of premium. These benefits are not optional for each employee; rather they are part of the coverage only if the employer has elected to include them in the plan. When a waiver of premium is included, all that is waived in case of disability is the portion of the premium necessary to pay the cost of the pure insurance protection for the employee and any dependents.

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