1 – Evidence of Insurability

Most insurance policies are designed to have a coverage level amount (e.g., $50,000) that employees may elect that is a “guaranteed” level of coverage. This amount is known as a “guaranteed issue” and is available to all employees when they are first eligible to enroll in coverage. If an employee wants to enroll in an amount higher than the guaranteed issue or is enrolling at a time other than when they were first eligible for the coverage, the insurance provider requires the employee to complete an evidence of insurability (EOI) form.

Until the employee has returned their EOI form and the insurance provider has notified the employer of their approval of the employee’s level of coverage above the guaranteed issue, the employer should only deduct premiums from an employee’s paycheck for the guaranteed issue amount.   

Why does this matter? 

If the employee fails to return their EOI form, or the insurer does not approve the increased life insurance amount, the insurer has no contractual obligation to pay a life insurance benefit above the guaranteed issue amount.

What does this mean? 

By taking premium payments for the full amount of coverage the employee elected, the employer may be misrepresenting to the employee the amount of their life insurance coverage. If the employee were to pass away, the employer may be responsible for paying the difference between the guaranteed issue benefit amount and the amount elected by the employee. (Example:  Van Loo v. Cajun Operating Co., 703 Fed. Appx. 388 (6th Cir. 2017))

2 – Portability or Conversion Rights

Most group life insurance plans have portability or conversion provisions that allow an employee to continue their coverage after the employee terminates employment or is no longer actively working (e.g., disability leave). The provisions explaining the employee’s rights are found in the life insurance policy documents (e.g., summary plan description).

In addition to making sure employees receive a copy of the insurance plan documents, it is a best practice for an employer to notify an employee who is losing coverage of their rights by providing a portability or conversion form, or instructions on obtaining a form in an employee’s termination packet.

Why does this matter? 

If the employee does not elect to continue their policy, the insurance carrier is no longer obligated to pay life insurance benefits if the former employee passes away.  

What does this mean? 

If an employee is terminated from employment or is out on a leave of absence and an employer failed to provide a former employee of their rights to keep the coverage in place, they may be liable to pay the life insurance amount.

3 – Terminating coverage according to policy terms

Keeping an employee on benefits when they are not actively at work is risky. Group life insurance policies contain rules that define when an employee is eligible for coverage and how long coverage remains in effect when an employee is no longer actively at work.  

Employers need to be familiar with the terms of their group life insurance plan and properly terminate coverage when an employee is no longer eligible.

Why does this matter? 

An insurer is not responsible for paying a life insurance benefit for an employee who passes away if they were ineligible to be enrolled on the plan.

What does this mean? 

The employer may be liable to pay the life insurance benefit if they misrepresented to the employee that coverage was in effect. (Example: McBean v. United of Omaha Life Insurance Co. and By Referral Only, Inc., Case No. 18cv16MMA (JLB) (S.D. Cal. Apr. 5, 2019).

Best Practices for Administration

An employer needs to read their policy and be knowledgeable about the rules. If an employer requires clarity on how to apply the rules or their responsibility, they should contact the insurance provider for assistance or seek guidance from legal counsel.

If you have questions about the above or need help with an employee benefits administration question, please contact us. We would love to hear from you!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything in this post or on this website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.