MR. WATSON: Okay, guys. We discussed this earlier. How much group insurance can I buy for each one of you so you (the employee) do not have to claim the premium as income?
STUDENTS: $50,000.
MR. WATSON: Any amount above $50,000, the employee must include the premium paid by the business as income. Remember Chapter 8? What's the IRS participation requirements rule?
STUDENTS: 70/85.
MR. WATSON: Exactly! Once again, to prevent the business from discriminating in favor of the highly paid employee, the IRS says the business:
- must cover at least 70% of all employees, or
- at least 85% of all participating employees must not be considered "key" employees.
How Benefits are Determined
MR. WATSON: How are benefits determined? One of three ways:
- Earnings. Everybody gets three times their salary. Right? Two times the salary-it's just an example, the but amount of insurance is based on your earnings.
- Employment position. Bank managers get this much. Tellers get that much. Whatever. Does that make sense? Supervisors get this amount, managers get that amount, directors get some other amount.
- Flat benefit. Everybody gets $50,000 regardless of salary or position.
Conversion
- 31 days to convert to a permanent plan
- Covered during this period even if conversions does not take place
MR. WATSON: When you leave the business's employment, you can convert it. What does "convert" mean?
STUDENT: Change.
MR. WATSON: Change from what to what?
STUDENT: Term to whole life?
MR. WATSON: Yep. More like from group to individual. You have 31 days to convert from the group plan to individual insurance. Will the premiums go up?
STUDENT: Yes. Because you are buying an individual policy.
MR. WATSON: Can the insurance company ask you about your health?
STUDENT: No
MR. WATSON: No. That's what "convert" means.
STUDENT: Guaranteed insurability?
MR. WATSON: Exactly. So you don't have to answer any health questions when you convert group life to individual life.
MR. WATSON: So let's do an example. Say I fire my wine taster employee for her lack of consumption. She died within 14 days of leaving. She did not convert. Is she covered?
STUDENTS: Yes.
MR. WATSON: She had 31 days, so she is still covered. You have 31 days to covert. You are still covered, even though you didn't convert. But, a lot of employers are now offering more than a conversion. They are offering something called portable group term. This means the employees can take (port) their group term insurance with them. It used to be that you could only convert to whole life, but that's expensive. But with this type of plan, all the ported policies are pooled together so the rates would be much cheaper than on an individual basis.
Other Forms of Group Insurance (Definitely tested)
Franchise Insurance ****
MR. WATSON: Franchise Insurance. Franchise is also called wholesale insurance - you are going to see it. You receive a policy. Doctors join the AMA. They can get a policy through the AMA. Attorneys get theirs through the bar associations. They can also be used for small employers whose numbers are less than the minimum required for their particular state's laws.
MR. WATSON: Group credit insurance. Decreasing term issued by banks to cover their debtors for the amounts of their respective loans. The banks need at least 100 debtors per year to qualify and the amount is limited to the amount of indebtedness. The lenders can insist you have credit life but they can not make you buy it from them, that would be coercion. The borrower can choose the insurer.
Blanket policy ****
MR. WATSON: Blanket policy. Blanket policies cover public places or events that have unnamed insureds. I have a good example.
MR. WATSON: An airline. A bus company. Little League. High school sports. This covers someone automatically, even if we don't know the names of the individuals.
MR. WATSON: What flies through the air and sometimes crashes? The airplane. Now, if you are on the plane and it crashes, you're covered. If you are not on the plane, you are not covered. The names are constantly changing. We don't know who will be on the plane tomorrow, but, who ever is on the plane is covered, if they have a "Blanket policy."
MR. WATSON: Kids on a playground. Churches. It covers events. Like if the school had a blanket policy, while you were here, attending class, if the building fell down, you would be covered.
MR. WATSON: Bus companies. It covers events, things where peoples' names are constantly changing. Friday night high school football players.