The continuation of group term insurance on employees after retirement requires the employer to make two important decisions: the amount of coverage to be continued and the method to be used to pay for the continued coverage. Although the full amount of coverage prior to retirement may be continued, the high cost of group term insurance coverage for employees at older ages 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.

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

A few employers fund postretirement benefits through a retired lives reserve, which is a fund established during the working years of employees for the purpose of paying all or a part of the cost of group term life insurance for the employees after retirement. Once popular, retired lives reserves are used little today because of administrative costs and the limited amount of coverage that can now be prefunded on a tax-deductible basis.

Forms of group life insurance to provide protection both before and after retirement have been written for many years. The earliest form was group paid-up insurance. Under a group paid-up insurance plan the total amount of insurance coverage is determined the same way as it is for group term insurance plans (for example, a schedule related to earnings or a flat amount). The amount of insurance consists of accumulating units of single-premium whole life insurance and decreasing amounts of group term insurance, with a total amount of coverage remaining constant.

In the 1970s group ordinary insurance became popular. It can be viewed essentially as dividing a whole life insurance policy into two segments: a term portion and a permanent or cash-value portion. The total amount of coverage available to an employee is determined the same way it is in group term insurance. The cost of the term portion of the coverage is paid by the employer, and the permanent portion, which the employee may be able to decline, is generally paid by the employee.

As a result of changes in tax laws both forms of coverage lost much of their popularity, and few new plans are written today.

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

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 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 lives or less.

Skeptics, including employees of some insurance companies offering group universal life, wonder if the administrative aspects can be accomplished in such a manner that it can be offered at a cost significantly lower than coverage 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 plans, as well as the highly competitive market for individual universal life insurance that has resulted in rates with extremely low margins for contributions to surplus. These drawbacks, coupled with the lack of employer contributions, make the potential for savings to employees through the group insurance approach less than for many other types of insurance. Other critics point out that the popularity of universal life insurance in general has decreased as interest rates have dropped over the last few years, and they wonder how successful universal life will be if interest rates drop further. However, plans that are installed are usually well received by employees, and participation generally meets or exceeds expectations.

In 1995, universal life insurance accounted for about 2 percent of group life certificates in force.

The general nature of group universal life insurance is essentially the same as individual universal life insurance. The following discussion focuses primarily on their differences.

Two approaches have been used in designing group universal life insurance products. Under the first approach there is a single group universal life insurance plan. An employee who wants only term insurance can pay a premium equal to the mortality and expense charges so that there is no accumulation of cash values. Naturally an employee who wants to accumulate cash values must pay a larger premium.

Under the second approach there are actually two group insurance plans�a term insurance plan and a universal life insurance plan. An employee who wants only term insurance contributes to the term insurance plan, and an employee who wants only universal life insurance contributes to the universal life insurance plan. With this approach an employee purchasing universal life insurance must make premium payments that are sufficient to generate a cash value accumulation. Initially the employee may be required to make minimum premium payments, such as two or three times the cost of the pure insurance. If an employee who has only the term insurance coverage later wants to switch to universal life insurance coverage, the group term insurance certificate is canceled, and the employee is issued a new certificate under the universal life insurance plan. An employee can also withdraw his or her cash accumulation under the universal life insurance plan and switch to the term insurance plan or can even have coverage under both plans. Typically an employee is eligible to purchase a maximum aggregate amount of coverage under the two plans. For example, if this amount is three times annual salary, the employee can purchase term insurance equal to two times salary and universal life insurance that has a pure insurance amount equal to one times salary.

Insurance companies that write group universal life insurance have underwriting standards concerning group size, the amounts of coverage available, and insurability.

Currently most group universal life insurance products are being limited primarily to employers who have at least 100 or 200 employees. However, a few insurers write coverage for even smaller groups. Some insurance companies also have an employee percentage-participation requirement, such as 20 or 25 percent, that must be satisfied before a group can be installed. Other insurance companies feel their marketing approach is designed so that adequate participation will result and therefore have no participation requirements.

Employees can generally elect amounts of pure insurance equal to varying multiples of their salaries, which typically start at one-half or one and range as high as three or five. There may be a minimum amount of coverage that must be purchased, such as $10,000. The maximum multiple an insurance company will offer is influenced by factors such as the size of the group, the amount of insurance provided under the employer�s basic employer-pay-all group term insurance plan, and the percentage participation in the plan. In general the rules regarding the amounts of coverage are the same as those that have been traditionally applied to supplemental group term life insurance plans. The initial premium, which is a function of an employee�s age and death benefit, is frequently designed to accumulate a cash value at age 65 equal to approximately 20 percent of the total death benefit.

Other approaches for determining the death benefit may be used, depending on insurance company practices and employer desires. Under some plans employees may elect specific amounts of insurance, such as $25,000, $50,000, or $100,000. Again an employee�s age and the death benefit selected determine the premium. Some plans allow an employee to select the premium he or she wants to pay. The amount of the premium and the employee�s age then automatically determine the amount of the death benefit.

The extent to which evidence of insurability is required of individual employees is also similar to that found under most supplemental group term life insurance plans. When an employee is initially eligible, coverage is usually issued on a guaranteed basis up to specified limits, which again are influenced by the size of the group, the amount of coverage provided under the employer�s basic group term insurance plan, and the degree of participation in the plan. If an employee chooses a larger death benefit, simplified underwriting is used up to a second amount, after which regular underwriting is used. Guaranteed issue is often unavailable for small groups, in which case underwriting on the basis of a simplified questionnaire is used up to a specific amount of death benefit, after which regular underwriting is used.

With some exceptions future increases in the amount of pure insurance are subject to evidence of insurability. These exceptions include additional amounts resulting from salary increases as long as the total amount of coverage remains within the guaranteed issue limit. A few insurance companies also allow additional purchases without evidence of insurability when certain events occur, such as marriage or the birth of a child.

With group universal life insurance products an employee usually has only one death benefit option available, and whether it is option A (level death benefit) or option B (increasing death benefit) depends on which one has been selected by the employer. In general there seems to be feeling that the availability of both options makes a plan more difficult to explain to employees and more costly to administer. Most employers have selected option B, which is generally more easily marketed to employees since the increasing total death benefit is a visible sign of any increase in their cash value or "investment." As a result several insurers now make only option B available with their group products.

Universal life insurance products give the insured the right to increase or decrease the death benefit from the level originally selected as circumstances change. For example, the policyowner might have initially selected a pure death benefit of $100,000 under option B. Because of the birth of a child, this amount might be increased to $150,000. Increases, but not decreases, typically require that the insured provide evidence of insurability.

Most products have a guaranteed mortality charge for 3 years, after which the mortality charge will be based on the experience of each particular group. As with experience rating in general, the credibility given to a group�s actual experience will be greater for larger groups. Most insurance companies guarantee that any future increases in the mortality charge will not exceed a stated maximum.

The products designed for small groups typically use pooled rates that apply to all groups insured through a particular trust. Therefore the mortality charge for any employer will vary, not with the employer�s overall experience but rather with the overall experience of the trust.

Probably the greatest variations among group life insurance products occur in the expense charges that are levied. Typically a percentage of each premium, such as 2 percent, is deducted for expenses. In addition, there is a flat monthly charge, normally ranging from $1 to $3, to maintain the accumulation account. Some insurance companies levy this charge against all certificate holders, even those who are contributing only enough to have the pure insurance coverage. Other insurance companies levy the charge only against those accounts that have a positive cash value accumulation. A few insurance companies also load their mortality charges for expenses. Finally many companies levy a transaction charge, such as $25, that often applies to withdrawals in early policy years. A transaction charge may also apply to policy loans and additional lump-sum contributions. In evaluating the expense charges of different insurers, one should remember that an insurer with a lower-than-average charge may be subtly compensating for this charge by having a higher mortality charge or crediting a lower interest rate to cash value accumulations than would otherwise be paid.

Most insurance companies guarantee that the initial interest rate credited to cash value accumulations will be in effect for one year. After that time the rate is typically adjusted quarterly or semiannually but cannot be below some contractual minimum such as 4.0 or 4.5 percent. The interest rate credited is usually determined on a discretionary basis but is influenced by the insurance company�s investment income and competitive factors. However, some insurers stipulate that it will be linked to some money market instrument, such as 3-month Treasury bills. In general the same interest is credited to all groups that an insurance company has underwritten.

Employees are allowed considerable flexibility in the amount and timing of premium payments. Premiums can be raised or lowered and even suspended. In the latter case the contract will terminate if an employee�s cash value accumulation is inadequate to pay current mortality and expense charges. Of course premium payments could be reinstated to prevent this from happening. Additional lump-sum contributions may also be made to the accumulation account.

Two restrictions are placed on premium adjustments. First, the premium payment cannot be such that the size of the cash value accumulation becomes so large in relationship to the pure protection that an employee�s coverage fails to qualify as a policy of insurance under IRS regulations. Second, since changes in premium payments through payroll deductions are costly to administer, many employers limit the frequency with which adjustments are allowed.

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. In addition, the interest rate credited 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, such as 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.

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.

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.

Several situations may arise in which an employee is no longer actively working or a group universal plan might be terminated by the employer.

Several options are available to the retiring employee. First, the employee can continue the group insurance coverage like an active employee. However, if premium payments are continued, the employee will be billed by the insurance company, probably on a quarterly basis. Because of the direct billing, the employee may also be subject to a higher monthly expense charge. Second, the employee can terminate the coverage and completely withdraw his or her accumulated cash value. Third, the employee can elect one of the policy settlement options for the liquidation of the cash value in the form of annuity income. Finally, some insurers allow the retiring employee to decrease the amount of pure insurance so that the cash value will be adequate to keep the policy in force without any more premium payments. In effect the employee then has a paid-up policy.

The same options are generally available to an employee who terminates employment prior to retirement. In contrast to most other types of group insurance arrangements, the continuation of coverage does not involve a conversion and the accompanying conversion charge; rather the employee usually remains in the same group. This ability to continue group coverage after termination of employment is commonly referred to as portability. If former employees who continue coverage have higher mortality rates, this will be reflected in the mortality charge for the entire group. However, at least one insurer places terminated employees into a separate group consisting of terminated employees from all plans. These persons will be subject to a mortality charge based solely on the experience of this group. Thus any higher mortality due to adverse selection will not be shared by the actively working employees.

If the employer terminates the group insurance arrangement, some insurance companies keep the group in force on a direct-bill basis, even if the coverage has been replaced with another insurer. Other insurance companies continue the group coverage only if the employer has not replaced the plan. If replacement occurs, the insurance company terminates the pure insurance amount and either gives the cash value to participants or transfers it to the trustee of the new plan.

Variations exist in the method by which employees are enrolled in group universal life insurance plans. Some early plans used agents who were compensated in the form of commissions or fees, but several insurance companies have dropped this practice. The actual enrollment is typically done by the employer with materials the insurance company provides. However, salaried or commissioned representatives of the insurer usually meet with the employees in group meetings to explain the plan.

The employer�s main administrative function is to process the payroll deductions associated with a plan. As previously mentioned, employee flexibility may be somewhat limited to minimize the costs of numerous changes in payroll deductions.

The insurance company or a third-party administrator performs other administrative functions, including providing employees with annual statements about their transactions and cash value accumulation under the plan. Toll-free telephone lines are often maintained to provide information and advice to employees.

Group universal life insurance products are not designed to be policies of insurance under Sec. 79. In addition, each employee pays the full cost of his or her coverage. Therefore the tax treatment is the same to employees as if they had purchased a universal life insurance policy in the individual insurance marketplace.

In the mid-1900s, most major insurers that wrote group universal life insurance introduced a variable product, which has the same basic characteristics that were previously described for group universal life with one major difference�employees have a series of investment accounts to which they may allocate their net premiums. Once an employee elects the initial allocation, all future net premiums are allocated in the same proportion unless the employee makes a written request for a change. With the one exception described below, there are no minimum guarantees, and the full investment risk rests solely with the employee.

Most group variable universal life insurance plans offer between eight and 15 differing types of investment funds. These typically include at least one and possibly more of the following: growth funds, bond funds, money market funds, index funds, international stock funds, mortgage securities funds, and small company stock funds. Employers can choose the investment options that will be made available to employees. For ease of administration and communication, this number is often in the range of four to six.

Many group variable universal life insurance products also have an account that has a minimum interest-rate guarantee. An employee who is selecting a 100 percent allocation to this account in effect has the equivalent of coverage under a group universal life insurance contract rather than a variable contract. This feature leads some observers to predict that if the variable product should gain widespread acceptance, there will be little need for insurers to maintain both a group universal life product and a group variable universal life product.