It is important to understand the different characteristics of your Group Life Insurance policy and a beneficial one is understanding your benefits and your benefit schedule. A benefit schedule is a predetermined statement of the formula under which benefits will be provided. Benefit schedules generally base coverage amounts on:
- Earnings – Proponents of an earnings basis schedule point out that this type of formula benefits survivors by providing an amount equal to full salary for a limited time after death and because it is tied to salary, will tend to increase with inflation. More productive employees who presumably are paid more are rewarded appropriately and if the plan requires contributions, cost is directly related to the employee’s ability to pay.
- Occupational classifications – Uniform amounts of coverage are provided within each classification. The advantage of this type of formula is that it is easy to administer and is somewhat related to the employee’s survivors’ needs, the employer’s assessment of the employee’s worth to the business, and the employee’s ability to pay in the case of a contributory plan.
- Flat benefit – This type of schedule provides a flat benefit amount for all participants. Giving everyone the same benefit is, of course, the easiest formula to administer and to the extent wage rates within the group are relatively uniform, coverage bears a close relationship to needs and abilities to pay. This is obviously not the correct formula to use in a multi-level business, but would be appropriate for very large multiple-employer groups providing coverage under collective bargaining agreements.
- Length of service – This formula rewards long term employees (some call this rewarding loyalty) and may tend to decrease an employee’s incentive to leave the firm. In reality, few employees would stay with a firm merely because of the group coverage or its formula, and the insurance coverage provided to employees under this method bears no relationship to their needs or ability to pay in the case of contributory coverage.
- A combination of these factors – The most common formula bases the amount of insurance on a multiple of the employee’s income—from one to three times earnings. Most insurers require a minimum of $5,000 on each covered employee or even $10,000 in the case of smaller groups. Some insurers require a minimum coverage for the entire group. Maximum coverage depends on the total volume of the group and state law ceilings, if any. Most companies will issue up to $500,000 or more on a given life although to protect themselves for ultra large amounts, group insurers use medical examinations, reinsure at least a portion of the coverage, and sometimes establish special reserves.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM