If one of the fringe benefits of your employment is group life insurance, a critical concern of most employees who become ill is how to maintain life insurance coverage while they are ill and cannot work.  If the illness is severe enough to require the employee to stop working, life insurance typically ends when the employee is no longer active at work.  However, there are ways that employees can protect their life insurance and continue coverage if they are unable to work.

Life Insurance Waiver of Premium Due to Disability

Most group life insurance policies contain provisions that allow for life insurance to continue while an employee is disabled without any requirement to pay premiums for the continued coverage.  An employee who becomes disabled should check their coverage and consult with human resources personnel to see if they are eligible to receive a life insurance waiver of premium.  

Life insurance waivers of premiums vary from policy to policy.  In some instances, eligibility for the waiver of premium benefit ends at age 60; other policies allow older employees to qualify.  Even if the employee qualifies for the life waiver of premium benefit, though, it is not forever and usually ends at a specified age such as age 65.

Another critical aspect of the life waiver of premium benefit is the meaning of “disability.” An employee may be able to qualify for disability benefits so long as they are unable to perform the duties of their regular occupation.  To qualify for a life insurance waiver of premium, though, the employee may need to meet a more stringent standard and establish their inability to perform any work at all.  

Human resources personnel may not be familiar with the life insurance waiver of premium benefit and might fail to advise an employee who stops working on account of disability about the benefit.  For that reason, employees need to be proactive.  Any employee who has employer-sponsored life insurance and needs to stop working on account of disability should request a copy of the life insurance coverage and ascertain their eligibility to receive the life insurance waiver of premium benefit.

Portability and Conversion

Group life insurance usually also offers two options to continue life insurance coverage after an employee ceases working, regardless of the reason.  One option is portability.  Portability means that the employee’s coverage is portable and can be taken with the employee when they leave so long as the employee takes over payment of premiums.  Conversion, on the other hand, is when the employee converts group insurance coverage to individual insurance coverage (usually whole life) and continues paying premiums thereafter.

Employees usually are limited to the amount of coverage in effect when they port or convert their group coverage, and the premium costs can be steep.  Also, in some instances, one or the other option is unavailable if the employee is disabled at the time employment ceases.  In either case, though, the employee is allowed to keep their existing coverage and is not required to undergo underwriting as a condition of receiving coverage.

Employees usually have a maximum of 31 days to convert or port their coverage after their employment ceases.  However, if the employee dies within that period without having taken action, conversion is automatic, and the beneficiary is entitled to receive the insurance benefits.  Once that period passes, though, the employee is no longer eligible to continue their coverage.

Issues That Often Arise in Continuing Life Insurance Coverage

While most employers have excellent human resources personnel who are familiar with and on top of making sure employees’ rights to continue their coverage are protected, mistakes occur.

  • No Good Deed Goes Unpunished – There is a sardonic saying that “no good deed goes unpunished.”  Unfortunately, the expression applies all too frequently with employers who try to do the right thing, but their kind efforts perversely create problems.  In such instances, an employer might think it would be helpful to the employee to simply keep that person on their group insurance, especially an employee who is known to be suffering from a terminal illness.  The problem that arises is that group life insurance contains an “active at work” requirement that automatically ends coverage for any employee who ceases working and does not elect portability or conversion; or who doesn’t apply for and qualify for a life insurance waiver of premium.  In such instances, the employer may end up having to pay the insurance benefit that was payable under the policy.
  • COBRA Only Applies to Health Insurance – It is the employer’s obligation to notify employees who cease working of their right to continue their life insurance.  Employers are aware of their obligation to give COBRA notices to employees who cease working in order to allow them to elect to continue their health insurance.  However, COBRA applies only to health insurance; and a separate notice of conversion and/or portability rights is required to continue life insurance coverage.  Employers have been known to forget to meet their obligation to give appropriate notice to employees who cease working on account of illness, and some even erroneously advise employees there is nothing that can be done to extend their life insurance coverage.  

If an employee loses their life insurance coverage because an employer has failed to provide notice of continuation rights or has misadvised the employee, and the employee dies, the employer may be liable for paying the beneficiary the amount of the life insurance that would otherwise have been payable.  Employee benefits are governed by the federal ERISA (Employee Retirement Income Security Act) law, and a key aspect of ERISA is that employers have a fiduciary obligation to notify employees of their rights, regardless of whether an affirmative inquiry is made by the employee.  The failure to provide an employee with an appropriate notice of their right to continue life insurance coverage can lead to a lawsuit by the beneficiary against the employee for breach of the employer’s fiduciary duty.  Until a few years ago, employees would not have been able to seek a remedy for such a breach, but as the result of a 2011 Supreme Court ruling, employees are now able to recover payment of the life insurance that would have been paid but for the employer’s misfeasance or nonfeasance.  

Conclusion:  How to Protect Your Life Insurance Benefits if You Become Ill

Life insurance is a key fringe benefit that many employers offer to their employees.  And while that benefit typically ends when an employee stops working for their employer, an employee who is ill can continue the financial protection for their families that life insurance offers by applying for a life waiver of premium (if eligible) or pursuing portability or conversion.

If an employer fails to provide appropriate notification to the employee of their right to continue coverage, the issues are complex, but there may be a right to still recover life insurance payments, even if the coverage has lapsed.  It is important in such circumstances to consult with an attorney who has the experience, expertise, knowledge, and understanding of the complex issues surrounding life insurance continuation who may be able to assist.

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