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THE GOVERNMENTAL ENVIRONMENT FOR
GROUP LIFE INSURANCE

The character of group life insurance has been greatly influenced by the numerous laws and regulations that have been imposed by both the state and federal governments. The major impact of state regulation has been felt through the insurance laws governing insurance companies and the products they sell. Traditionally these laws have affected only those benefit plans funded with insurance contracts. The federal laws affecting group life insurance, on the other hand, have generally been directed toward any benefit plans that are established by employers for their employees, regardless of the funding method used.

State Regulation

Some of the more significant state laws and regulations affecting group insurance include those pertaining to the types of groups eligible for coverage, benefit limitations, and contractual provisions. Moreover, since many employers have employees in several states, the extent of the regulatory jurisdiction of each state is a question of some concern.

Eligible Groups

Most states do not allow group insurance contracts to be written unless a minimum number of persons are insured under the contract. This requirement, which may vary by type of coverage and type of group, is most common in group life insurance, where the minimum number required for plans established by individual employers is generally 10 persons. A few states have either a lower minimum or no such requirement. A higher minimum, often 100 persons, may be imposed on other plans, such as those established by trusts, labor unions, or creditors.

The majority of states also have insurance laws concerning the types of groups for which insurance companies may write group insurance. Most of these laws specify that a group insurance contract cannot be delivered to a policyowner in the state unless the group meets certain statutory eligibility requirements for its type of group. In some states these eligibility requirements even vary by type of coverage. While the categories of eligible groups may vary, at least five types of groups are acceptable in virtually all states: individual employer groups, negotiated trusteeships, trade associations, creditor-debtor groups, and labor union groups. Other types of groups, including multiple-employer welfare arrangements, are also acceptable in some states. Some states have no insurance laws regarding the types or sizes of groups for which insurance companies may write group insurance. Rather, eligibility is determined by the underwriting standards of insurance companies.

 

Individual Employer Groups. The most common type of eligible group is the individual employer group in which the employer may be a corporation, a partnership, or a sole proprietorship. Many state laws are very specific about what constitutes an employee for group insurance purposes. In addition to those usually considered to be employees of a firm, coverage can generally be written for retired employees and employees of subsidiary and affiliated firms. Furthermore, individual proprietors or partners are usually eligible for coverage as long as they are actively engaged in and devote a substantial part of their time to the conduct of the organization. Similarly directors of a corporation may also be eligible for coverage if they are also employees of the corporation.

 

Negotiated Trusteeships (Taft-Hartley Trusts). Negotiated trusteeships are formed as a result of collective bargaining over benefits between a union and the employers of the union members. Generally the union employees are in the same industry or a related one. For the most part these industries, such as trucking or construction, are characterized by frequent movement of union members among employers. The Taft-Hartley Act prohibits employers from paying funds directly to a labor union for the purpose of providing group insurance coverage to members. Payments may be made to a trust fund established for the purpose of purchasing insurance. The group insurance contract is then issued to the trustee. The trustees of the fund must be made up of equal numbers of representatives from the employers and the union. The trustees can elect either to self-fund benefits or to purchase insurance contracts with themselves as the policyowners. Since eligible employees include only members of the collective-bargaining unit (which may include some nonunion members), benefits for other employees must be provided in some other manner.

Negotiated trusteeships differ from other types of groups in the way benefits are financed and the way eligibility for benefits is determined. Employers often make contributions based on the number of hours worked by the employees covered under the collective-bargaining agreement, regardless of whether these employees are eligible for benefits. Eligibility for benefits during a given period is usually based only on some minimum number of hours worked during a previous period. For example, a union member might receive coverage during a calendar quarter (even while unemployed) if he or she worked at least 300 hours in the previous calendar quarter.

 

Trade Associations. For eligibility purposes a trade association is an association of employers that has been formed for reasons other than obtaining insurance. In most cases these employers are in the same industry or type of business. In many such associations there is frequently a large number of employers who do not have the minimum number of employees necessary to qualify for an individual employer group insurance contract. While in some states the master contract is issued directly to the trade association, in most states it is necessary that a trust be established. Through payment of premiums to the association or the trust, individual employers may provide coverage for their employees.

Both adverse selection and administrative costs tend to be greater in trade association groups than in many other types of groups. Therefore most underwriters and state laws require that a minimum percentage of the employers belonging to the association, such as 50 percent, participate in the plan and that a minimum number of employees, possibly as high as 500, be covered. In addition, individual underwriting or strict provisions regarding preexisting conditions may be used, and employer contributions are usually required. To ensure adequate enrollment the underwriter must determine whether the association has the resources as well as the desire to promote the plan enthusiastically and to administer it properly.

 

Multiple-Employer Welfare Arrangements. The final type of eligible group designed to provide benefits for employees is the multiple-employer welfare arrangement (MEWA). MEWAs are a common but often controversial method of marketing group benefits to employers who have a small number of employees. MEWAs are legal entities (1) sponsored by an insurance company, an independent administrator, or some other person or organization and (2) organized for the purpose of providing group benefits to the employees of more than one employer. Each MEWA is either an insurance company or a professional administrator. MEWAs may be organized as trusts, in which case there must be a trustee that may be an individual but is usually a corporate trustee, such as a commercial bank.

MEWAs are generally established to provide group benefits to employers within a specific industry, such as construction, agriculture, or banking. However, employers are not required to belong to an association. MEWAs may provide either a single type of insurance (such as life insurance) or a wide range of coverages (for example, life, medical expense, and disability income insurance). In some cases alternative forms of the same coverage are available (such as comprehensive health insurance or basic health insurance).

An employer desiring to obtain insurance coverage for its employees from a MEWA must subscribe to and become a member of the MEWA. The employer is issued a joinder agreement, which spells out the relationship between the MEWA and the employer and specifies the coverages to which the employer has subscribed. It should be noted that it is not necessary for an employer to subscribe to all coverages offered by a MEWA.

A MEWA may either provide benefits on a self-funded basis or fund benefits with a contract purchased from an insurance company. In the latter case the MEWA, rather than the subscribing employers, is the master insurance contract holder. In either case the employees of subscribing employers receive benefit descriptions (certificates of insurance in insured MEWAs) in a manner similar to the usual group insurance arrangement.

In addition to alternative methods of funding benefits, MEWAs can also be categorized according to how they are administered, that is, whether by an insurance company or by a third-party administrator. It is generally agreed that there are three types of MEWAs. Unfortunately the terminology used to describe the three types is not uniform. In this chapter the following terminology and definitions will be used:

 

 

Creditor-Debtor Groups. Creditor-debtor relationships give rise to groups that are eligible for group term life insurance. While the types of creditors and debtors may vary, coverage is normally made available for organizations such as banks, finance companies, and retailers with respect to time-payment purchases, personal loans, or charge accounts. A unique feature of group credit life insurance is that the creditor must be the beneficiary of the coverage in addition to being the policyowner even though the debtors are the insured. Any payments to the creditor must be used to cancel the insured portion of the debt. Premiums for group creditor life insurance may be shared by the creditor and the debtor or may be totally paid by either party.

The following traditional restrictions imposed by eligibility statutes also reflect insurance company underwriting practices:

 

 

Because of the abuses associated with such factors as coercion, excessive premium rates, and lack of disclosure, many states have additional regulations pertaining to group credit insurance. Common provisions include

 

 

While this chapter concentrates on the use of group insurance as an employee benefit, it should be noted that group creditor insurance, particularly creditor life insurance, is a significant and growing form of group insurance. According to the American Council of Life Insurance, $230 billion of credit life insurance was in force at the end of 1995, under approximately 65 million individual policies or certificates of group insurance. Detailed statistics are not available, but it is estimated that between 80 and 90 percent of this amount is group insurance. While the amount of credit life insurance has increased within the past decade, the majority of the growth has been in the average size of the policy or certificate of insurance rather than in the number of policies or certificates of insurance.

 

Labor Union Groups. Labor unions may establish group insurance plans to provide benefits for their members, with the master contract issued to the union. In addition to the prohibition by the Taft-Hartley Act of employer payments to labor unions for insurance premiums, state laws generally prohibit plans in which union members pay the entire cost from their own pockets. Consequently the premiums come solely from union funds or partially from union funds and partially from members� contributions. Labor union groups account for a relatively small amount of group insurance, but most of it is life insurance.

 

Other Groups. Numerous other types of groups may be eligible for group insurance under the regulations of many states. These include alumni associations, professional associations, veterans� groups, savings account depositors, and credit card holders. Insurance company underwriting practices and state regulations may impose more stringent requirements on these types of groups than on those involving an employer-employee relationship. Individual evidence of insurability is frequently required for other than small amounts of coverage. In addition, a larger minimum size is generally imposed upon the group.

Contractual Provisions

Through its insurance laws every state provides for the regulation of contractual provisions. In many instances certain contractual provisions must be included in group insurance policies. These mandatory provisions may be altered only if they result in more favorable treatment of the policyowner. Such provisions tend to be most uniform from state to state in the area of group life insurance, primarily because of the widespread adoption of the NAIC model bill pertaining to group life insurance standard provisions. As a result of state regulation, coupled with industry practices, the provisions of most group life policies are relatively uniform from company to company. An insurance company�s policy forms can usually be used in all states. However, riders may be necessary to bring certain provisions into compliance with the regulations of some states.

Benefit Limitations

Statutory limitations may be imposed on the level of benefits that can be provided under group insurance contracts issued to certain types of eligible groups. In the past most states limited the amount of group life insurance that could be provided by an employer to an employee, but only Texas still has such a restriction. However, several states limit the amount of coverage that can be provided under contracts issued to groups other than individual employer groups. In addition, some states limit the amount of life insurance coverage that may be provided for dependents.

Regulatory Jurisdiction

A group insurance contract will often insure individuals living in more than one state�a situation that raises the question of which state or states have regulatory jurisdiction over the contract. This issue is a crucial one since factors such as minimum enrollment percentages, maximum amounts of life insurance, and required contract provisions vary among the states.

Few problems arise if the insured group qualifies as an eligible group in all the states where insured individuals reside. Individual employer groups, negotiated trusteeships, labor union groups, and creditor-debtor groups fall into this category. Under the doctrine of comity, by which states recognize within their own territory the laws of other states, it is generally accepted that the state in which the group insurance contract is delivered to the policyowner has governing jurisdiction. Therefore the contract must conform only to the laws and regulations of this one state, even though certificates of insurance may be delivered in other states. However, a few states have statutes that prohibit insurance issued in other states from covering residents of their state unless the contract conforms with their laws and regulations. While these statutes are effective with respect to insurance companies licensed within the state (that is, admitted companies), their effectiveness with respect to nonadmitted companies is questionable, since states lack regulatory jurisdiction over these companies.

This does not mean that the policyowner may arbitrarily seek out a situs (place of delivery) that is most desirable from a regulatory standpoint. Unless the state of delivery has a significant relationship to the insurance transaction, other states may seek to exercise their regulatory authority. Therefore it has become common practice that an acceptable situs must be at least one of the following:

 

 

While a policyowner may have a choice of situs if these locations differ, most insurers are reluctant to issue a group contract in any state unless a corporate officer or trustee who can execute acceptance of the contract is located in that state and unless the principal functions related to the administration of the group contract will be performed there.

The issue of regulatory jurisdiction is more complex for those types of groups that are not considered to be eligible groups in all states. Multiple-employer welfare arrangements are a typical example. If a state has no regulation to the contrary and if the insured group would be eligible for group insurance in other states, the situation is the same as previously described. In addition, most other states will accept the doctrine of comity and will not interfere with the regulatory jurisdiction of the state where the contract is delivered. However, some states either prohibit coverage from being issued or require that it conform with the state�s laws and regulations other than those pertaining to eligible groups.

Federal Regulation

Federal laws and regulations do not affect group life insurance contract provisions directly. Rather they affect the design of an employer�s benefit plan. However, plan design often does influence the provisions of a group life insurance contract purchased by the employer. For example, the Age Discrimination in Employment Act prohibits an employer from eliminating benefits for older employees, but does allow some reduction in coverage. If an employer elects such reductions, they will be reflected in the benefits provided by the policy.

The two aspects of federal law that probably have had the greatest effect in the design of group life insurance plans are the Internal Revenue Code and ERISA.

The Internal Revenue Code determines the deductibility of employer contributions and the income taxation of employees who are provided coverage. Changes in the code have had a significant effect in the popularity of various types of group life insurance products.

ERISA requires employers to establish and maintain a group life insurance plan pursuant to a written plan document. This document specifies the plan fiduciary (or fiduciaries) who has the responsibility for selecting the insurance carrier. ERISA imposes duties on the fiduciary to protect plan participants. ERISA also requires the employer to disclose and report certain information to plan participants and the federal government.

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