Association Group Insurance: An Overview
Thousands of organizations across the country,
including your Academy, offer their members
a special type of insurance known as "association
group." Association group insurance
is unique in design, structure and administration
from other forms of coverage. The Academy
believes that an awareness of the distinct
characteristics of this insurance is important
to help members make informed decisions about
their insurance needs. Therefore, as a service
to members, this monograph seeks to foster
a better understanding of how association
group insurance works and its potential role
within one's overall insurance program.
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The Group Insurance Concept
When the modern insurance concept first evolved
near the middle of the Nineteenth Century,
all policies were "individual"
contracts. An individual insurance policy,
as the name implies, insures one person;
it is purchased on an individual basis, generally
through an insurance agent. The insurance
company issues or rejects the coverage based
solely on the applicant's health, occupation
and other underwriting factors. (For more
information on how insurance risks are evaluated,
see the monograph entitled: How Life Insurance
Works, available at no charge from AAFP Insurance
Services.)
Once the applicant meets the underwriting
requirements established by the insurer,
he or she is issued an insurance policy,
which is the actual legal contract between
the insured and the company. Individual insurance
still accounts for the majority of coverage
sold in this country.
By the start of the Twentieth Century, however,
due in part to rapid industrial growth and
the wave of immigration that led to the rise
of fraternal benefit and other mutual aid
societies, more cost effective ways of providing
insurance to a larger number of people were
being explored. The result was group insurance.
Under the group concept, a number of people
band together through work, an association
or a fraternal organization. Before the group
can qualify to offer insurance to members,
it must meet two requirements:
By law, the insurance must be "incidental"
to the group: The group must exist for purposes
other than to purchase insurance.
The group must be a "natural" group,
with at least one bonding characteristic
common to all members. For instance, the
group may consist of labor union members,
employees of a single company, professionals
such as medical doctors, or members of an
ethnic or religious group.
Unlike individual insurance, group insurance
is purchased collectively. A single master
policy is issued to either an employer or
association. A number of persons are then
insured under the umbrella of this single
master policy. Individual members receive
certificates of insurance that summarize
the provisions contained in the master policy.
Under an employer-sponsored group plan, the
employer applies for the coverage and is
listed as the policy owner. Premiums are
submitted by the employer to the insurance
company. When an association sponsors group
insurance, the association or an appointed
trustee becomes the master policyholder.
Under the terms of the master policy, each
insured member receives a certificate of
insurance coverage and pays his or her own
premiums.
A key feature of group insurance is group
underwriting. Risks are assessed based on
the demographic composition of the group
rather than by the specific characteristics
of the individual. Most of all, because there
are fewer administration and underwriting
requirements, and lower acquisition costs
(due in part to no sales commissions to agents),
the costs to members can be significantly
lower than for comparable individual coverage.
Once all relevant group factors are analyzed,
initial rates are established under the master
policy. Rates are set uniformly and without
discrimination for all members of the group,
based on age. Rates increase as the individual
ages, generally at one-year or five-year
intervals. Rates cannot be raised for an
individual due to a specific health or other
underwriting condition. Under the terms of
the master policy, however, rates for the
entire group, or specific age bands within
the group, can be revised periodically to
reflect claim experience and expenses.
Another factor that influences a group's
rates is the length of time a program is
in force. Generally, the longer the master
policy has been in force within a group,
the more closely loss and expense projections
reflect the group's actual experience. This
can reduce administration expenses and, in
turn, lead to rate reductions for insured
members.
Better-than-projected experience can also
result in "experience credits,"
also known as dividends, which can further
reduce the net cost of coverage for members
among well-established plans.
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The Advantages of Association Group Insurance
There are thousands of associations throughout
the country representing a wide assortment
of groups and people. Association group insurance
offers members a number of benefits. These
include:
Low group rates in comparison to similar
individual plans. In general, because of
the high volume and low overhead administration
of association plans, their rates rank among
the lowest available.
Exclusive eligibility. Only members of the
pre-approved group -- and in some cases family
members and members' employees -- can apply
for coverage. Though there may be certain
age and health restrictions, the majority
of members are generally eligible for specific
amounts of coverage automatically, by virtue
of their membership in the association.
Protection against termination. Under the
provisions of the master policy, coverage
for an individual cannot be canceled once
it has been approved, regardless of the member's
state of health. A member's insurance can
be terminated only if he or she fails to
pay required premiums or leaves the group.
Under some plans, coverage will be reduced
or terminate at a certain age, such as 65.
The master policy, however, can be canceled
by either the insurance company or the master
policyholder at any renewal date.
Conversion privilege. In many cases, when
members leave the group, they can convert
their coverage to individual coverage without
the need to provide evidence of insurability.
This feature protects members' insurability,
regardless of their current health status.
Additionally, if the master policy is terminated,
replacement coverage will generally be offered
to the members.
Group underwriting. As mentioned above, each
plan is tailored to the needs and demographics
of the particular group. Before the master
policy is issued, facts about members of
the group are analyzed. Such information
as average ages, sex, income, type of work
and working environment is factored into
the underwriting equation.
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The Drawbacks of Association Group Insurance
Association group insurance has a great deal
to offer eligible members. However, this
coverage is not without its limitations:
Since eligibility is based on group membership,
coverage is not portable and can be costly
to convert when a member leaves the group.
In many association plans, coverage is generally
designed to terminate without benefit after
one's working years. This can be a disadvantage
for members who require coverage to continue
into retirement. Be aware, however, that
an increasing number of associations have
addressed this concern and continue coverage
on life insurance and medical insurance for
older members.
Rates increase with the member's age. In
some cases, costs can become prohibitively
high in older years.
Since the master policy can be canceled at
any renewal by either the association or
the insurer, there is no guarantee that coverage
will be continued.
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The Role of Association Group in Your Insurance
Portfolio
Association group insurance can provide quality,
low-cost protection. What role, if any, should
it play in your insurance program? Since
each individual is different, with unique
insurance needs, it is not appropriate to
make blanket recommendations. However, insurance
experts generally agree that the purpose
of association insurance is to augment, not
replace, individual coverage. They recommend
a healthy mix of coverage with a balance
of individual and group insurance.
Specifically, experience has shown that association
group works well in the following situations:
As a low-cost base of insurance during one's
younger years, when needs are rising but
resources are limited. (This should eventually
be rounded out by permanent, individual coverage
over time.)
As a cost-effective supplement to an existing
base of individual insurance, providing expanded
insurance protection at a reasonable cost.
As an economical means of meeting temporary
insurance needs, especially during family
dependency years. Association insurance makes
it possible to obtain large amounts of protection
at attractive group rates. When the need
for insurance declines as children grow up
and leave home, the coverage can be canceled.
As a convenience. Since association group
is generally made available to members through
the mail, no sales representatives will call.
For members who have a solid understanding
of their insurance needs, association group
offers a convenient, cost-effective alternative
to purchasing insurance through commissioned
agents.
Association group insurance is viewed by
millions of Americans as an important, value-added
privilege of membership in their association.
It provides members with the opportunity
to purchase valuable insurance protection
at low group rates. While association insurance
may not be appropriate for all needs and
all situations, it is ideal to provide an
initial base of protection and to supplement
individual coverage.