Every year, during the on boarding process or the annual benefits renewal window, employees face a familiar dilemma. They log into their company’s benefits portal, click through to understand the health insurance details, and scroll past a line item for ‘group term life’, or GTL. Beyond the headline, many employees don’t bother understanding the cover age amount, its sufficiency and granu lar details. However, a life insurance policy is a critical safety net that only activates during a family’s most devas tating moment. While corporate health insurance is tested frequently with mi nor claims, GTL is tested exactly once.
The sum assured illusion
The low engagement in GTL is reflected in the varying levels of cover provided by companies. A large number of com panies opt for a flat sum assured, say Rs.20 lakh or Rs.30 lakh. While the concept of flat sum assured can work for health insurance, it certainly doesn’t work for life insurance.
The objective of life insurance is to provide a replacement income to the de pendents of the deceased employee. So, providing a one-time benefit of Rs.30 lakh to a family that lost its breadwinner, earning an annual income of Rs.50 lakh, is vastly inadequate. That is why it is impor tant to link the GTL cover to an employee’s annual salary. Employers who link the sum assured to cost to company (CTC) generally use a multiple of 2. However, it is also possible to have varying multiples based on tenure, grade, and family size.
The free cover limit gap
Unlike group health policies, which don’t re quire medical underwriting, group term life plans require medical review for select indi viduals. GTL policies carry a feature called the free cover limit (FCL). This is essentially a threshold of sum assured, beyond which the employee has to go through a medical check up. If an employee’s sum assured is below this threshold, then the coverage is automatic.
However, if an employee’s sum assured ex ceeds the threshold, then until the employee goes through a medical check-up and the un derwriter approves the full cover, the employ ee is only covered up to the FCL. This feature is often not implemented well. Generally, senior executives of a company cross this threshold. Primarily due to lack of coordina tion, the medical check-up remains pending. As a result, the senior-most employees of the company remain only partially covered. It is imperative that all employees, who are eli gible for this check, should be informed im mediately and subsequently such check-ups should be prioritised. Notwithstanding, it is also possible to negotiate a higher FCL with the insurer to minimize these outages.
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The nomination disconnect
The benefit of life insurance accrues to the employee’s nominee. In the absence of proper nomination, if there are disputes on who is the rightful beneficiary, the law re quires the benefit amount then to be given to class I heirs. For a male employee, his widow, and his mother are both classified as class I heirs, among others. This can be a struggle for human resources (HR) to settle the claim. To avoid such scenarios, it is im portant that a proper nomination is made by each employee, and the same is duly re corded and maintained by the HR.
It is equally important to keep updating the records at regular intervals, so that changes in case of major life events are duly noted. For instance, an employee’s wedding or death of a parent may necessitate change in nomination. Disputes have arisen be cause the nomination was recorded at the time of joining, and thereafter the employee got married, but the nomination was never updated. Many insurers do not maintain the nomination records in their system. At the time of claim, such insurers depend on the HR to provide them with the nomina tion details. Because of this, it becomes even more important for HR to update their nomination records specifically for GTL.
When coverage becomes void
GTL is relatively a straight-forward policy with limited caveats. Suicide— an exclusion for the first year in indi vidual life insurance policies—can be covered from day one in a GTL plan. Besides that, there are no exclusions.
However, there are two conditions under which the coverage becomes void. First, while the GTL is a world wide cover, in case of international travel, insurers have a set of rules that need to be complied with. For example, travel to sanctioned countries is not covered. Insurers may require a prior declaration if it is a long duration trav el. It is important to check these rules specifically with the insurer. Second, insurers impose an “actively at work” clause in GTL. This is specifically ap plicable, when a coverage is initiated for the first time. If an employee has been on a long medical leave prior to the coverage inception, then the person can be deemed to be not covered. Again, this clause can vary by insurer.
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Switching insurers is hard
Renewal of a GTL plan can sometimes become tricky. As there are no wait ing periods, the plan is easily portable from one insurer to another. However, there is a substantial price barrier.
Life insurance coverage requires payment of stamp duty of 20p for every Rs.1,000 of sum assured for initiating new coverage. So, at the time of renewal, the incumbent insurer need not pay it again. However, any prospective new insurer needs to pay the stamp duty. This creates a pricing anomaly. Even if the new in surer may quote a lower risk premium, their ability to write the business becomes low be cause of the stamp duty expense.
The importance of life cover truly hits when a young person dies in the immediate circle, such as a colleague, a friend, or some one in the extended family. This was true dur ing the Covid pandemic, when employers and employees were both keen to put a life cover in place. Unfortunately, it becomes difficult to buy a cover in times like these. The same principle applies to the decisions within an ex isting policy. There is no second chance to up date a nomination, no opportunity to rectify a pending medical check-up, no way to increase a sum assured that was set too low years ago.
The decisions you make today are acts of care for employees because you are taking care of their families when they would be una ble to. That is what makes GTL different from every other line item on a benefits portal. And it is why the organisations that administer it well are not just managing a policy; they are honouring a commitment.
The Author is Co-Founder, Securenow Insurance Brokers
