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What is group insurance and how does it work?

When an insurer provides insurance coverage for many people under a single master contract, the result is group insurance. Although the employer group is by far the most common setting in which to find a contract of group insurance, group coverage has also been offered to members of social fraternities, alumni associations and through banks and other lenders to insure the debts of their borrowers.

Group insurance operates under entirely different concepts and principles than does individual insurance. Many mistakenly assume that group insurance is a large scale wholesaling of individual term policies under a common administration. This is not the case. Group coverage insures “classes of persons”, not individuals. The contract of group insurance is between the insurer and the organization purchasing the group contract (most often an employer). Different employees may enter or leave the group, but the names of individual employees never appear in the contract.

The two main classes of group insurance are group life insurance and group accident and sickness insurance.

Group life insurance allows the employee to name the beneficiary of their choice. The employee has a special conversion privilege upon termination from the group. Under the conversion privilege, the insurer allows the employee to convert the amount of their group coverage into an individual life insurance policy without any evidence of insurability up to certain limits. This can be an extremely valuable benefit, particularly for an individual who is uninsurable. Group life insurance is also offered in small amounts to the employee’s spouse and dependent children.

Group Accident and Sickness Insurance has five major components. A weekly income benefit (short-term disability), long term disability, accidental death and dismemberment, extended health care benefit and a dental care benefit.

The size of the benefits, deductible amounts and co-insurance amounts can vary considerably from plan to plan. All individuals covered by group insurance policies should take the time to understand the extent of their coverage.