The purpose of insurance is for risk mitigation—risk of loss of life—risk of loss of income—risk of a catastrophic event. Group insurance provides mass protection against these financial hazards and is designed to insure classes of persons rather than specific individuals. The lives insured are not named or otherwise identified as individuals. They are simply defined as members of a class (the “group”).
Since the coverage is generally underwritten (provided to a certain level) without medical evidence (proof of good heath), group insurance plans are expected to adhere to the following fundamental principles:
- Full-time work activity the employee must be actively at work on a full-time basis (according to the terms of the contract) on the plan’s effective date. Enrolment of any employees who are off sick at that time must be delayed until active employment is resumed.
Actively working employees may be assumed to be in a reasonable state of health. As such they can be insured for an appropriate premium without requiring any evidence of health. Due to their full-time work status, by the compilation tables, these employees are expected to exhibit a level of mortality (incidence of death) or morbidity (incidence of sickness or accident and disability) lower than that of the general population. This is why all eligible employees can be insured regardless of their state of health.
In combination with the tax viability, this non-evidence feature is the single most important characteristic of group insurance—coverage for those who may otherwise be considered uninsurable.
- Non-discriminatory coverage schedule insured amounts are laid out in the benefit schedules in the master contract between the insurance carrier (underwriter)/benefit provider and employer (the “insured”). This avoids problems that would arise if employees individually choose the amount they feel they need. As a condition of employment, people who become employees after the plan is installed normally must enroll within a specified period, usually within 31 days after the waiting period has been satisfied.
This principle serves to prevent anti-selection whereby an employer may choose not to offer coverage to certain employees, or an employee may choose to only opt into a plan when they have an existing medical condition. This behaviour is detrimental to the insurer and the program as a whole. The amount of insurance, even optional amounts over and above a basic level of coverage is determined according to the schedule of benefits in the master contract.
- Payroll deduction method for employees’ premium contributions to avoid any need for individual premium collection, all employee contributions are deducted from pay and included, usually monthly, with the employer’s remittance to the insurer. The employer pays the bill 100% and payroll deducts (where applicable) the employee’s portion.
- Compulsory contributions by the employer though employers are not required to pay the entire premium, especially the taxable benefits like life insurance, and disability, they must make a reasonable contribution, which is considered half the overall costs. Without employer participation, the plan would be unattractive and, in many cases, financially unviable. It is the employer’s responsibility to ensure that all premiums are paid.
- Spreading the risk this is safety in numbers. Although mandatory participation is stressed for a number of reasons outlined throughout this book, for groups of a certain size, only a minimum participation is required. Participation levels are written into the master contract.
When an employer pays 100% of the premium, (non-contributory groups) all of the employees must be covered under the group plan.
The objective in spreading the risk is to ensure that the group includes sufficient healthy lives to minimize overall claims from the group. This keeps premiums at a level that is acceptable for both the policyholder and the plan members.
By adhering to these fundamental principles, group coverage can be offered at a significantly lower cost and far less stringent underwriting requirements than for individual insurance. The protection extends, without extra cost, to employees whose health is impaired and who would ordinarily find additional protection denied to them or available only by payment of an increased premium.
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