Types of Group Life Plans

Types of Insurance used in Group:

1. Group Term life
2. Group Permanent (whole life, much more expensive)

Term

MR. WATSON: The most common type is annual renewable term. Why annual renewable term? It's cheaper.

Permanent

MR. WATSON: Second type would be group permanent. If a business is wanting to attract a certain type of employee, like an aerospace engineer, they may be willing to spend more money on insurance premiums. They use this a "fringe benefit". More expensive, but it attracts a certain type of employee.

MR. WATSON: Permanent has three basic types:

1. Ordinary cash value whole life insurance
2. Group paid-up
3. Group universal

MR. WATSON: Ordinary cash value whole life insurance. The business would use this as a carrot. Work for my company ten or twenty years, you can take it with you. Remember, the business owner is paying the premiums. The cash value could be borrowed tax free for retirement. If you leave before the stipulated time, I'm going to keep the cash value because I have been paying for it and you did not meet the conditions of our agreement. It is set up however I, the employer, want to set it up.

MR. WATSON: Group paid-up. We decide on an amount of insurance, let's say $40,000. I, the employer, buy term insurance. You, the employee, would buy little tiny paid-up insurance. In other words, let's say your contributions this year bought $2,000 of paid-up insurance. Then I would buy how much of term for you?

STUDENTS: $38,000.

MR. WATSON: So if you die, your husband gets what?

STUDENTS: $40,000.

MR. WATSON: Next year you buy $3,000 worth of paid-up insurance. So you now own how much? You had $2,000 paid up from the prior year.

STUDENTS: $5,000.

MR. WATSON: So, my contributions for you would purchase $35,000 of A.R.T. The next year, your contributions bought $5,000 of paid-up.

STUDENTS: So it's $10,000.

MR. WATSON: So how much would I buy?

STUDENTS: $30,000.

MR. WATSON: Eventually you would end up owning what?

STUDENTS: $40,000.

MR. WATSON: $40,000 of paid-up insurance. Everybody understand? Once again, we have ordinary cash value insurance and group paid-up.

MR. WATSON: Group universal. This is cool stuff. You pay into the universal life. They take out an amount for the cost of the insurance; the rest goes to cash value. You remember that? Well, I pay the cost of insurance for you, so any contributions you put in goes to your cash value. Make sense?

STUDENTS: Yes.

MR. WATSON: So, a business can provide insurance in one of two forms, group term or group permanent. Group permanent may be offered in one of three ways:

1. Ordinary cash value
2. Group paid-up
3. Group universal