As its name implies, group universal life combines the economy of scale and other advantages of group coverage with the flexibility and potential for gain of a universal life contract. It is a combination of group term life insurance with a cash accumulation feature. The insurer issues a master contract to an employer who in turn makes it available to employees who receive certificates of coverage and who pay the entire premium.
The policy is divided into two separate portions: (1) pure life insurance protection; and (2) the cash values. A part of each premium goes toward mortality costs (i.e., the charge for the term insurance), while the balance of the covered employee’s premium is placed (after certain expense charges are subtracted) into the cash value portion of the policy. Premiums are flexible, not fixed. Each insured can, at his discretion, increase or decrease the premium, increase or decrease the benefits, or borrow against the cash value. (All of these flexible options are subject to some limit on frequency to keep administrative costs down.) As is the case with individual policy universal life, an employee’s premium payments can be suspended, and coverage will continue as long as the cash value is high enough to meet the insurer’s mortality and expense charges.
The typical group universal life contract is held by a large group of 1,000 or more employees. Employees pay the entire premium for the coverage and the employer’s only outlay is for indirect costs such as installation and administration.
A GUL contract can be purchased as a standalone employee benefit or it may be combined with group term. An employee may participate in either or both plans. An employee who participates in the GUL plan must pay premiums high enough to build some cash value. An employee who begins in the term insurance plan may later switch to the GUL plan, or vice versa.
Death benefits are usually pegged to some multiple of salary (e.g., one to five times earnings). Some plans of smaller employers limit the salary multiple to some lower amount, such as three times salary, or provide for specific dollar limits such as $25,000 or $50,000. For administrative simplicity, the plan will offer either level or the more popular increasing death benefits, but once the employer makes the decision all employees must use the same option.
GUL plans usually guarantee the initial interest rate on cash value accumulations for one year. The rate is then adjusted every three to six months, subject to some guaranteed minimum. This rate adjustment is made at the sole discretion of the insurer.
Taxation is the same as under an individual universal life policy. Thus, premiums are nondeductible, cash values accumulate tax-free, and death proceeds are generally income tax-free.
Advantages to GUL are enjoyed by both the employer and employee. Some of these include:
- The employer’s direct costs are limited to the expenses of installation, payroll deductions, and ongoing administration.
- Although the plan entails no direct employer out-of-pocket cost for premiums, the existence of the plan has the psychological effect of reducing the pressure on employer-provided postretirement benefits.
- Employees who participate in a group universal life plan receive universal life insurance at group rates.
- Covered employees can continue coverage into retirement.
- Employees can purchase coverage based on their individual needs.
- Policy cash values of the plan are available to employees through either a withdrawal or loan.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM