Quick Answer
A sponsor holds the group life master policy, and a covered member receives a certificate. Contributory and noncontributory describe who pays premiums. Conversion and portability are different continuation methods. Business life insurance can protect against a key person's death or supply money for a buy-sell agreement, depending on ownership and beneficiary roles.
Who Holds the Group Policy Rights?
- The employer or other eligible sponsor usually holds the master policy, the contract that governs the group coverage.
- A covered member receives a certificate, which describes coverage under the master policy. Possessing the certificate does not make the member the master policyowner.
- Receiving a certificate booklet does not by itself start coverage. Check the plan's eligibility and effective-date conditions.
- Read the current contract documents for the eligible class, benefit formula, dependent coverage, and any required member contribution.
- Apply the member's class formula; different classes can have different benefits.
- Check the latest valid beneficiary designation separately. Sponsor funding does not by itself replace the member's beneficiary.
Example: A stated class benefit equals twice annual salary, and the member earns $50,000.
- Identify the class multiplier: 2.
- Apply it: 2 × $50,000 = $100,000 of coverage.
What Do Contributory and Noncontributory Mean?
- Contributory: Covered members pay some or all of the premium. The sponsor may pay the balance but does not have to.
- Noncontributory: The employer or other sponsor pays the full premium without member contributions.
- To find the member-funded percentage, divide the member contribution by the total premium and multiply by 100. For example, $12 of a $60 premium is 12 ÷ 60 × 100 = 20%.
These labels describe funding. They do not decide who is insured, who owns the master policy, who receives proceeds, whether dependents are eligible, or how much coverage each class receives.
- An employer can combine sponsor-paid basic coverage with member-paid optional coverage. The certificate may start basic coverage when eligibility and active-work conditions are met but require an application before optional coverage starts. Apply the actual enrollment, effective-date, work-status, and evidence requirements; eligibility alone does not complete a required application.
If a contribution is missed, apply the certificate's payment and grace terms. A payroll change alone does not establish when coverage ends. Check whether direct payment is permitted and which deadline applies under the contract.
Exam Tip: Gotchas
- Paying part of the premium does not make an employee the owner of the master policy or change the employee's beneficiary rights.
How Do Conversion and Portability Differ?
- Conversion replaces lost group coverage with an individual policy when the stated conditions are met. It may allow timely conversion without new evidence of insurability, proof that the person still qualifies for coverage.
- Portability continues eligible coverage through a group arrangement. It can have separate health, age, duration, and payment conditions.
- Check the event ending coverage, application deadline, maximum amount, available policy form, health questions, and required premium.
- A converted policy has its own pricing. The old payroll deduction, group rate, and former employer contribution do not automatically continue.
Exam Tip: Gotchas
- Never import an issuer example's deadline, amount, or product choice into every group plan. Apply the terms stated in the question or contract.
How Do Key-Person and Buy-Sell Uses Differ?
| Use | Usual policy roles | Financial purpose |
|---|---|---|
| Key-person life | Business owns coverage on the key employee or owner and receives the proceeds | Helps the business absorb lost revenue, replacement costs, or other disruption after the insured dies |
| Cross-purchase buy-sell | Each buying owner owns coverage on the other owner and receives the proceeds | Gives the surviving buyer funds to purchase the deceased owner's interest |
| Entity-purchase buy-sell | The business owns coverage on each owner and receives the proceeds | Gives the business funds to purchase the deceased owner's interest |
Insurance supplies money. The written buy-sell agreement creates the purchase obligation. A policy without an agreement can provide proceeds without requiring a purchase; an unfunded agreement can require a purchase without supplying insurance money.
Example: Find the Purchase Funding Gap
A buy-sell agreement requires a surviving buyer to pay $500,000 for a deceased owner's interest. The buyer has $120,000 reserved for that purchase.
- Start with the agreed purchase price: $500,000.
- Subtract the other funds available for this purchase: $500,000 − $120,000 = $380,000.
The $380,000 gap still needs funding. Any insurance proceeds used for the purchase must be available to the party who must buy the interest.
For every business scenario, identify the financial loss, obligated buyer, policyowner, insured, and beneficiary. Disability protection applies only when the contract adds it.
What Should You Check on Exam Day?
- Who holds the master policy, and what does the member's certificate show?
- Does the funding arrangement require a member contribution?
- Is continuation through an individual policy or a group arrangement?
- Which party suffers the loss or must complete the purchase?
- Do the policy roles match that purpose and the written agreement?