Employee Life Insurance

Beware of These Plans. Employee life insurance: A Life Insurance Plan Where Everyone Loses.

If more people knew the truths about Employee Life Insurance, employees would never use them and employers would never sponsor them. These plans have endless loopholes that let insurers cancel coverage and deny claims, and shift liability onto employers. Most employers don’t even know the liability they accept when they offer employee life insurance to their employees.

If we assume that employees pay for life insurance because they want to leave money to their family when they die, then employee life insurance is a terrible offering. If we assume that people are under the impression that when they pay their life insurance premium they are protected with a lump sum of money that will go to their family when they die, then employee life insurance is garbage.

We (the Center for Life Insurance Disputes) represent beneficiaries of denied life insurance claims, so we have a lot of insight into why and how often Employee Life Insurance policy claims get denied. The stories are saddening. We’ve heard one person after another tell us about how the insurer; accepted their premiums but refused their claim, denied coverage because they never received a form that the employee didn’t even know about, and forced families into lawsuits over denied claims.

These plans are everywhere but their numbers are dwindling. Insurance-Forums reports that employer-sponsored life insurance offerings have declined 23% between 2006 and 2017.[1]

Here are some of the verifiable facts about Employee Life Insurance that make it garbage:

Policies are routinely canceled because of employment status changes but the insured isn’t notified.
Insurers don’t have to follow standard notification rules – directly contacting the insured – when a premium is late or when coverage is going to lapse.
Going from full-time to part-time status can lapse a policy without the employee even knowing it.
Employers have fiduciary responsibility liability for the acts of the insurer.
Coverage status is determined on an after-the-fact basis (an employee or employer could pay for years of premiums without knowing the policy had lapsed).
Going out on Family Medical Leave will cause a policy to lapse.
There’s no penalty to an insurer who refuses to pay a claim. A verdict against an insurer for an Employee Life Insurance policy only requires the insurer to pay the policy amount (no damages, ever!).
No one is saving money on the cost of buying a policy under an Employee Life Insurance plan.
The limitations of ERISA laws will go with the policy, even when it’s ported.
Domestic partnerships must be formalized in order for a partner to receive claim money.
Liability for claims can fall on the employer, instead of the insurer.
The employer has liability it didn’t intend to accept. The insurer can blame the employer for what would normally be an insurer’s responsibility.
It’s to the benefit of insurers to force claim disputes into litigation.
Claims of $150,000 or less are unattractive to attorneys, leaving beneficiaries with few remedies.
Everything about ERISA, which governs employee life insurance plans, favors insurers.

Employee life insurance is supposed be a benefit to the employees of a business, union, or trade group. It isn’t. In fact, it stinks. If insurers were required to disclose how many claims they deny each year, the results would show, by far, that most denied claims are from corporate-sponsored employee life insurance policies.

There are two ways to tackle this problem and make change happen. One is to propose new laws, or changes to existing laws, that give equal treatment to policyholders and beneficiaries. The other way is to make the market speak to the insurance companies. When employers stop offering these plans, premiums will stop coming in to insurers. Then, insurers will make changes.

What is Employee Life Insurance?

For this article, it’s any life insurance policy that is offered as part of an employee, association or union benefit package in which the premiums are paid by the insured-employee through a payroll deduction. And, the governing laws of the policies and claims are federal – ERISA (Employee Retirement Income Security Act).

It’s also known as employer life insurance, employer-sponsored life insurance, group life insurance plan, union life insurance, association life insurance, voluntary life insurance, supplemental life insurance, erisa plan life insurance, and others. It’s not group-term life insurance of $50,000 or less, paid by an employer.

Who Might Be Insured by Employee Life Insurance?

Employees of any US corporation.

Faculty members of schools, colleges and universities.

Union members.

Trade association members (AMA, ABA, ADA, and many others).

What are the benefits of an Employee Life Insurance Plan under ERISA laws, versus a plan not governed by ERISA laws?

To the insured; NONE!

There are no greater benefits to an employee under an ERISA plan. It’s not cheaper. There’s no more coverage than with a non-erisa plan. Nothing about the erisa plan is more beneficial.

To an employer; NONE!

The employer isn’t paying the premium of an Employee Life Insurance policy, so they aren’t saving any money. But, by doing nothing more than including this (supplemental) life insurance in its benefits package, employers are subjecting themselves to a huge amount of liability.

To the insurer; THE LEGAL RIGHT TO CANCEL COVERAGE, DENY CLAIMS AND AVOID LIABILITY.

What Can be Done to Create a Change in Favor of Employees?

Employees: ask your employer to cancel any supplemental life insurance plan they’re sponsoring and change to a voluntary life insurance plan exempt from ERISA laws.
Agents: Stop selling Employee Life Insurance that is governed by ERISA laws.
Employers: Stop sponsoring Employee Life Insurance that is governed by ERISA laws.
Human Resources contractors: Warn your corporate clients about the liability of Employee Life Insurance.
Corporate attorneys: Warn your board of directors of the liability it accepts by sponsoring Employee Life Insurance.

By acting collectively, change in this market can happen quickly. If premiums stop coming to the insurers, they’ll change their offerings and make them fair to policyholders. Let the market speak.

What’s the Alternative to Employee Life Insurance governed by ERISA laws?

Simply, an Employee Life Insurance Plan that conforms to the ERISA exemption. We’re not proposing that employees cancel their life insurance and live without coverage. No. We’re proposing that employees get covered by life insurance plans that will:

Notify you and one other person when your premiums are late or your coverage is at risk of lapsing.
Stay in effect even if the employee succumbs to a disability and cannot work.
Pay a benefit to a domestic partner – regardless of any formal contract between the partners.
Penalize an insurer for wrongly cancelling coverage or denying a claim.

This article is broken-up into two sections for the reader. The short version ends here with our REQUEST for YOUR COMMENTS at the bottom of this page. We’d like to hear from anyone who wants to share their experience with employer life insurance.

For those seeking a much more in-depth understanding of Employee Life Insurance, including; erisa court cases, court decisions, contract language and more, this article continues below.

Appealing a Denied Death Claim from an Employee Life Insurance Policy

Let’s walk through an example of an Employee Life Insurance claim that gets denied and the beneficiary believes the denial is incorrect.

After the beneficiary submits a claim form and death certificate to the insurer it opens an investigation into the insured’s employment information. Was he working full-time when he died? Was he on part-time work status? Was he on FMLA? Were his premiums current? In other words, now that he’s dead, is there any information the insurer can obtain that discharges them from paying the claim?

Let’s assume that the insurer finds that the employee had been on Family Medical Leave and his policy lapsed because while on FML his compensation stopped, so his premiums weren’t made.

The claim is denied. According to the wife, her husband had no idea there was a problem with the policy. The insurer sends a Denial letter and, after explaining why the claim is denied, tells the wife (beneficiary) she has 60 days to appeal the claim denial. But, the exact language they use is,

“Under ERISA, you have the right to appeal this decision within sixty (60) days after receipt of this letter. To do so, you must submit a written request for appeal to (Insurance Company). Please include in your appeal letter the reason(s) you believe the claim was improperly denied, and submit any additional comments, documents, records or other information relating to your claim that you deem appropriate to enable Us to give your appeal proper consideration. Upon your request, We will provide you with a copy of the records and/or reports that are relevant to your claim.”

This is standard language in all Employee Life Insurance claim denial letters. What this ‘standard clause’ fails to disclose is that:

She will only get one (1) appeal, and
Whatever documents and records she presents in her appeal are the only documents she can then use in a lawsuit if her appeal is denied. (Now, how many people know how to prepare documentation for a lawsuit?).

The wife writes a long and detailed letter about how responsible her husband was, how he had no idea that his life insurance benefits would lapse, and how he never received any notification that this would occur. Unfortunately, the wife has no idea that she’s just used her only appeal. And, unfortunately, her letter is a heart-felt plea rather than a fact-based appeal with supporting documentation. So, the insurer denies her appeal. Now, the only option she has is to find an attorney to sue the insurance company.

If her claim is $150,000.00 or less, she’ll be hard-pressed to find any attorney to represent her because attorney’s fees are rarely awarded in Erisa matters. So, an attorney’s compensation will be limited to a percentage of the policy amount. And, Erisa life insurance claims that go to court don’t allow for penalties against the insurer. What’s left? Only the amount of the policy benefit.

With a standard legal fee of 33%, there isn’t enough money for most attorneys to work for 18 months for a $50,000 (or less) payment. Take a claim amount down to $100,000 and finding an attorney is almost impossible.

If however, this woman’s claim is say $750,000, she’ll probably find many more interested attorneys. Until, that is, they realize that with her appeal she exhausted her access to new supporting evidence.

But, instead of focusing on the insurance company, her attorney decides to sue her husband’s employer for breach of fiduciary duty because they didn’t assure that her husband received notice that his policy was going to lapse during his time away from work under FMLA.

Think this is just hypothetical? It’s actually not. In 2017 a judge awarded $750,000.00 to the wife of a deceased insured under an Employee Life Insurance plan. And guess who had to pay? Not the insurer. It was an award against the employer.[2]

The only stake in this plan the employer had was to offer life insurance benefits to its employees. It never thought of itself as being the entity that would become responsible for notifications and paying the claim.

An employer has liability it didn’t intend to accept with Employee Life Insurance under Erisa laws. It’s not worth it, when employers can offer the same benefit, at the same cost, without liability, with a plan exempt from Erisa laws.

Domestic Partnerships

Domestic partners can be denied the death benefit of an Employee Life Insurance policy, even when they are the named beneficiary. Too often the Domestic Partner won’t know they’re not going to get the money until after their partner has died.

Common policy language for a Domestic Partner is,

“A Domestic Partner (DP) is defined as an eligible dependent. (The Group Policy provides the same benefits for parties to a Civil Union as are granted to a spouse/DP in marriage, for residents of any state that so mandates such similar benefits.)”

This has the appearance of the Employee Life Insurance plan recognizing Domestic Partnerships. And these plans do, as long as the partnership can be proven.

A couple that have been together, lived as husband and wife, raised children together, cared for each other and shared finances, but aren’t able to prove their partnership in a way that satisfies the insurer will have massive obstacles in leaving a death benefit to one another under an employee life insurance plan. Every state has their own unique determination for domestic partnerships.

But why should someone have to prove their relationship in order to receive an insurance benefit their partner purchased? This question isn’t even raised when the employee is insured under an Erisa-exempt employee life insurance policy.

No Disability Waiver of Premium

Employer life insurance doesn’t include a provision for waiving the premium when the insured becomes disabled – known as disability waiver of premium. In fact, employee life insurance and employee disability insurance are rarely connected such that the employee life insurance premiums will be excluded for as long as the insured is disabled. Instead, if at all, the insured gets a 12-month reprieve and then either pays the premium himself or the life insurance policy lapses.

Payroll Deduction is a Problem

The premiums come out of the insured’s paycheck. That’s a huge part of the problem. Non-employee policies’ premiums are billed to the policyowner. This creates a paper-trail of notification when premiums are due, are late, or a policy is in danger of lapsing. And, unlike an erisa plan, state laws require the insurer to offer notification about the status of the policy to a third-party. In other words, for non-erisa policies, the insurer would have to notify someone besides the insured when their premium is late.

Imagine all the policies that would be saved with this simple option. For example, employee-dad gets in a car accident and is in the hospital. He’s not working now so he’s not receiving a paycheck. No payment can be deducted from his paycheck for his life insurance premium. His wife, who could write a check for the premium, has no idea this is happening. In fact, no one knows because there’s no secondary notification requirement. His policy terminates, and dad dies from is accident while in the hospital. No benefit is payable and the insurer has no fault. Unfair?

Changing Your Hours Can Forfeit Your Life Insurance

An even more unfair loss of coverage can happen because employee life insurance plans are not only subject to premium payments, they can also be subject to the insured working a certain number of hours per week to be eligible for the coverage. And the determination of whether someone was covered when they died happens when a claim is made, not before. Insurers will accept premiums even when coverage has lapsed, giving the employee the impression that his/her policy is in good standing. It’s not until a claim is made that they’ll then determine if coverage was in effect.

A Life Insurance Policy versus a Plan Summary

The beneficiary will receive a letter that says this provision was all in the Policy. But, employees aren’t given policies unless they specifically request them. Instead, they’re given Plan Summaries. Plan Summaries are…summaries. They don’t include policy specifics and details. But let’s be honest, who knows what the terms in a life insurance policy mean anyway? Probably not a regional sales manager for a software firm. Probably not a store manager for Walmart. Probably not most people who lack any formal training in contracts or life insurance.

So, an employee with no life insurance contract experience, who doesn’t have the life insurance contract, is supposed to know that their coverage can lapse when their employment status changes for any of a multitude of reasons and it’s their responsibility to know that the insurer has no obligation to inform them or notify them except for the policy…that they don’t have.

The Employer’s Liability is Enormous

As a Plan fiduciary, the employer may end up being the party responsible for actions it would expect the insurance company to perform. Notifications are usually the issue and employers, as plan (sponsors), unknowingly accept liability that would otherwise fall on the insurer. In some instances the employer ends up having to pay an amount of money equal to the life insurance claim.

In Schwartz v Keolis[3], the employer sponsoring the life insurance made the assumption that an employee was automatically covered under their plan because their was no requirement by the insurer for proof of insurability. However, the individual responsible for enrolling participants in the Plan is a fiduciary and, in this case, that person failed to satisfy her fiduciary responsibilities with due care because she neglected to send Schwartz’s application to Unum or obtain evidence of insurability.

Erwood v. Life Insurance Company of North America and Wellstar Health System, Inc. Group Life Insurance Program, decided April 13, 2017, involves a disabled physician who arranged to meet with his employer’s benefit representative to discuss the benefits the physician employee would be able to continue during his disability due to an illness that was expected to result in his death in the near future. During the meeting with the employer’s benefit representative, the disabled physician and his spouse clearly expressed their desire to continue all welfare benefit coverages as then in place for as long as possible. The benefit representative provided the physician and his spouse with information regarding how all coverages would be continued while the disabled physician was on FMLA leave and how, following the expiration of the FMLA leave, medical, dental and vision coverage could be continued via COBRA. No mention was made by the benefit representative of how the physician could continue his $750,000 life insurance coverage by converting his group life insurance coverage under his employer’s welfare plan to an individual life insurance policy.

Following the physician’s death, the physician’s widow brought suit against the life insurance plan, arguing that the employer, in its capacity as the administrator of its life insurance plan, is liable under ERISA for the $750,000 in life insurance benefits because the employer failed to inform the physician employee of his right to convert his group life coverage under the employer’s welfare plan to an individual life insurance policy.

Notwithstanding that the right to convert to an individual insurance policy had long since expired, the court crafted a remedy under ERISA that imposed a surcharge on the employer equal to the $750,000 in life insurance that the physician employee would have elected to convert to an individual policy but for the plan administrator’s breach of its fiduciary duty; the court also awarded the physician’s spouse interest, legal fees and costs associated with bringing the lawsuit. Because the ability to convert to an individual policy was no longer available, the employer, and not the insurance company, is obligated to make all of these payments.[4]

In Winkelspecht v Gustave A. Larsen Co. the court granted the life insurance company’s motion for summary judgment and dismissed it from the case. However, the court also found the employer liable for breach of fiduciary duty. The court agreed that the temporary administrator was not an ERISA fiduciary. Nevertheless, it concluded that her misrepresentation triggered fiduciary liability for the employer (in its capacity as plan administrator) because, inter alia, the employer held the temp out to participants as its representative for benefits purposes, and did not adequately train her on issues surrounding the life insurance plan. The court distinguished Seventh Circuit law refusing to hold fiduciaries liable for misrepresentations made by non-fiduciary agents, explaining that, in those cases, the fiduciaries had satisfied their duties by distributing to participants clear and complete plan documents. In this case, the court stated, the employer had distributed an SPD which did not clearly address who would be responsible for the life insurance premiums in question.[5]

In Brenner v. Metropolitan Life Ins. Co., 2015 U.S. Dist. LEXIS 36044 at * 21 (D. Mass. Mar. 3, 2015) (insurer, “in general … would not be considered liable for failing to send an individual notice of conversion or to otherwise advise the [insureds] of their rights”).

Lewis v. Kratos Defense and Security Solutions, Inc., et al. Case 1-12-cv-01012-TSE-TCB (E.D. Va. June 11, 2013). The Plaintiff in this case, the widow of the late Jimmy Lewis, brought this suit to recover benefits under her late husband’s employer-sponsored life insurance plan. Mr. Lewis had been employed by the Defendant Kratos at the time of his death and the Plaintiff was the named beneficiary under the policy. The other Defendant, Life Insurance Company of America (“LINA”), had issued the policy. During Mr. Lewis’s life, Kratos had told him that he was covered by life insurance and deducted money from his paycheck for premiums. After Mr. Lewis died, LINA determined that he had been ineligible for the life insurance policy and denied the claim for benefits. The Plaintiff claimed that Kratos had breached its duty to Mr. Lewis when, knowing that Mr. Lewis was not eligible for enrollment in the plan, it failed to tell Mr. Lewis that he was ineligible, enrolled him in the plan, deducted premiums from his paycheck, and forwarded the premiums to LINA. The Plaintiff also claimed that LINA – which was responsible for claim determinations under the plan – had breached its duties or abused its discretion in determining that Mr. Lewis did not qualify for benefits under the plan. Each side filed motions for summary judgment on these issues.

The Court found that the employer was liable, but the insurer was not.[6]

Is this Really What the Creators of ERISA had in Mind?

Employees, talk to your employers about moving to an ERISA-Exempt Life Insurance Plan.

[1] https://insurance-forums.com/employee-benefits/group-life/less-than-half-of-employers-offer-life-insurance-as-a-benefit/

[2] See Erwood v. Life Insurance Company of North America and Wellstar Health System, Inc. Group Life Insurance Program.

[3] Schwartz v. Keolis Commuter Servs., No. 16-CV-11506-LTS, 2018 WL 1411202 (D. Mass. Mar. 20, 2018).

[4] Buchanan, Ingersoll & Rooney, PC.

[5] Littler News March 14, 2012.

[6] Shelly Cupp Schulte, July 7, 2013.

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