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.

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:

1. By law, the insurance must be "incidental" to the group: The group must exist for purposes other than to purchase insurance.
   
   
2. 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.

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.

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.

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:

1. 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.)
   
   
2. As a cost-effective supplement to an existing base of individual insurance, providing expanded insurance protection at a reasonable cost.
   
   
3. 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.
   
   
4. 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.