Continuation of insurance cover for fund members – board considerations
By Adél Gräbe – Legal and Technical Specialist
The fiduciary duties of the board of management (board) of a retirement fund towards the fund and its members include studying and understanding the rules of the fund and the benefits it offers. One of the aspects that may be covered in the fund rules is death and/or disability cover (insured risk benefits) offered to members via the fund. These benefits may include a continuation option available to fund members at an additional cost.
A continuation option is a benefit that allows fund members to convert the group insurance cover they enjoy as members, to individual policies in their own name when they leave employment, without having to provide full medical evidence of insurability. The board needs to refer to the fund’s group insurance policies to determine whether the benefit is available to members. In deciding whether having a continuation option serves a purpose, the board needs to take into account the following factors:
Benefit of offering a continuation option vs the cost
A continuation option would be attractive to retiring fund members, for members leaving the employer’s service without having secured further employment, or for those moving to another employer where risk cover is not part of their employment package or where risk cover is limited.
However, adding a continuation option to fund members’ existing risk insurance cover would result in increased premiums for all fund members.
The cost of individual cover and health screening
When converting to individual cover, the member’s premium for securing the same cover may increase, as they are no longer part of a group scheme benefiting from cross-subsidisation and being underwritten on a group basis without individual underwriting (health screening). When quoting for the individual cover, the insurer will advise the medical evidence required, but this may be limited to checks such as an HIV test, a cotinine test to determine smoking status, or BMI measurements.
Using the continuation option
If the insured risk cover enjoyed by fund members includes a continuation option, it is important that the board advise members of the period within which the continuation option must be exercised by the member, as stipulated in the policy – usually within 30 or 60 days of leaving the service of the employer. On expiry of this period, the option to convert to individual cover will lapse.
The board should enquire from the insurer and check the policy to determine whether members who are still deciding whether to continue their cover, would be covered during the 30- or 60-day period.
Choosing a different insurer
The continuation option is only available should a member choose to convert the cover with the same insurer that offers the group benefits to fund members. Should the member take out individual cover with a different insurer, they will not qualify for the benefits that accompany the continuation option.
Including all members
The board also needs to consider whether to include retiring members in the continuation option cover, as well as members who are no longer actively working but are in receipt of a monthly disability income. In both cases, cover would become more expensive for all members due to the increased risk of claims.
Conclusion
Deciding whether to retain or add a continuation option to fund members’ risk benefits, the board needs to carefully consider the demographics and needs of the fund members and weigh the cost of the benefit against its intended purpose.
Read the article from EBnet