Understanding Group Insurance
Group Insurance is written to cover individuals but is sold on a mass basis through their employers or some organization to which they belong. All group members are covered under a single policy issued to the employer or organization. Each participant, however, receives a certificate as proof of coverage.
Most group insurance programs cover the employees of a single employer. However, group plans may also be written for multiple employer groups, labor unions, public employee associations, debtors of a single creditor, trade and professional associations, and other groups.
Group insurance usually is made available to all eligible employees or members without individual proof of insurability. This feature makes it possible to issue insurance to many persons who otherwise could not obtain any because of poor health or other reasons.
The mass distribution of insurance through group programs results in lower premium charges to the consumer. Most of the saving results from lower agency commissions on group contracts as compared with commissions on individual policies. In addition, there is some reduction in premium collection expense because the employer or organization collects the premium from the individuals and forwards them to the insurer. The expenses of some clerical operations, and sometimes claims adjustment as well, are transferred from the insurer to the employer and thus are removed from the premium.
In the absence of individual proof of insurability, insurers rely upon broad underwriting rules to avoid insuring a disproportionate number of poor risks. The policy must insure at least a specified minimum number of persons, frequently 10, although it varies among insurers. Many states have statutes that specify a minimum number of persons for insurance under a group policy.
All eligible employees must participate in the program if the employer pays all of the premium. If the employee pays part of the premium, at least 75% of eligible employees must participate.
A group insurance program under which the employer pays the entire premium is called a noncontributory plan. If the employee pays part of the premium, it is a contributory plan.
To prevent the selection of greater coverage by persons most likely to have a claim, the amount of insurance for each employee is determined by a formula. There must be a regular flow of young people into the program so that the average age of the members does not rise to the point at which the cost of insurance becomes prohibitive. Each employee must be actively at work on the day that his insurance becomes effective.
Group Life Insurance
About 97% of group life insurance is one-year renewable term coverage. Under this form of insurance the premium for each individual would ordinarily increase with each year of age. However, under an employee group plan, the premiums for all employees are averaged. This system would not be attractive to young employees without at least partial payment by the employer.
Protection under a group term insurance program ceases when employment is terminated, but the employee may convert the term coverage to a permanent form of life insurance without proof of insurability. Many employers continue some group term insurance for retired employees.
About 2% of group life insurance is written under combination plans, which provide some term and some permanent insurance. Less than 1% is written under various forms of level premium permanent insurance.
Group Health Insurance
Several forms of health insurance are written on a group basis. They include hospital, surgical and medical expense, major medical expense, income replacement coverage, and accidental death and dismemberment insurance. The protection provided under group health policies is essentially the same as under individual health insurance contracts. Insurers have also experimented with coverage for dental expense and mental illness expense under group programs.
The first group annuities were written under a form similar to individual deferred annuities. Each annual premium purchased an increment of paid-up annuity with benefits deferred until retirement age. A later development is the group deposit administration • contract, under which the annual premium deposits are held by the insurer at interest and used to purchase an annuity for each employee when he retires. The major advantage of this approach is the greater flexibility permitted in the funding of pension benefits. Immediate participation guarantee contracts are even more flexible because individual annuities usually are not purchased at retirement. Benefits under this contract are paid directly from the accumulated premium deposits. A separate account may be used with either of these two types of contract to permit investment of deposit funds in equity securities.
Property and Liability Insurance
Group marketing techniques have not been used extensively in property and liability insurance, but several insurers have experimented with quasi-group automobile and homeowner's insurance programs. Such programs usually have involved issuance of individual policies to and individual underwriting selection of participants. Very few plans have dispensed with individual underwriting selection.
Group life insurance in the United States generally is traced to a proposal submitted by Montgomery Ward and Company to several life insurers in 1910. The program was written by the Equitable Life Assurance Society of the United States in 1912. Montgomery Ward also purchased the first group income replacement health insurance contract in the United States in 1911. The first group annuity contract was issued in 1921.
All forms of group insurance experienced rapid growth during and immediately following World War II. The wage freeze during the war did not apply to premiums for employee insurance programs, and these programs were used to attract scarce labor.
More than one third of the life insurance in force in the United States is written under group plans. About 50% of all Americans insured for loss of income, 75% of those insured for hospital expenses, and 903? of those insured for major medical expenses are covered under group plans. More than 7 million persons were covered under group annuities at the start of the 1970's.