Explained: All about free cover limit in group term insurance policies

insurance, life insurance, claims management, term life insurance, critical health, facts in good faith

Life and health insurance covers offered by companies constitute key incentives for employees. Now, the life insurance cover offered through a group platform has several distinct advantages. It is generally cheap, easy to acquire and covers a large group under one policy. Free cover limit (FCL) is one of the key elements in a group term life insurance policy. Here are a few things you should know about it

What is group term life insurance?

A policy on a group platform is issued for one year. It can be renewed each year by the administrator, that is, the employer. In the case of employer-employee groups, the policy is issued in the name of employer and the employer looks after the administration of the policy and deals with the insurer for addition and deletion of employees from the group policy and claims management as well. The employer pays premiums for all employees and offers either flat or graded cover to them. For example, all employees may get a flat sum assured of Rs 5 lakh each or they may get be allocated sum assured of Rs 5 lakh, 7 lakh, 10 lakh and so on based on their grades or designation bands. In some cases, the sum assured is linked to employees’ salaries – for example, the cover could be three times the employee’s annual cost to company (CTC).

What is free cover limit?

On the group term life insurance platform, the idea is to cover a large group of individuals at minimum cost. That calls for simplified underwriting and here’s where FCL comes into the picture.

FCL is a level of sum assured that is offered to a firm’s employees without insisting on medical tests or seeking evidence of good health. It is computed after taking into account various factors relating to the group members: average age, number of members, historical growth rate and past mortality experience, if available. For example, for a group of 1000 employees with age below 65 years, an FCL of Rs 50 lakh may be offered by the insurer.

How does FCL work?

FCL does not mean you get life insurance cover for free. It simply means if the member of the group has sum assured that is lower than the FCL, then he is offered insurance without any underwriting requirement provided he is actively at work. For the employees who are not actively at work and are below the FCL,  life insurance is offered only after they resume work.

Individuals who are above the FCL have to undergo some underwriting requirements. It could be a good health declaration, questionnaire or even medical tests. The insurer may also specify some age limit, above which the medical may be compulsory.

Let’s say an employee whose eligible sum assured is above FCL and is asked to go for medical tests. But he refuses to do so. In that case, his life cover is capped at the FCL.

“If an employee has to undergo medical tests and the outcomes are adverse – say, he is found to have a critical health condition – the acceptance of the proposal with medical condition beyond FCL limits depends on the sum insured, underwriter and severity or criticality of medical condition,” says Saroj Kanta Satapathy, Chief Operating Officer, J B Boda Insurance & Reinsurance Brokers.

In case of group term life insurance covers, FCL sum assured is granted to all employees without seeking any person-specific information from them.

Top-up plans

Some employers offer additional cover to their employees over and above the sum assured available through compulsory enrolment for the employer-employee group. Such additional cover is optional. It is termed as a top-up cover. Generally, FCL is not offered to such top-up covers. The insurer calls for good health declaration, health questionnaire or medical test in such a scenario.

If your sum assured is higher than the FCL and the insurer calls for additional underwriting requirements, then it makes sense to disclose facts in good faith and acquire the cover. Group life covers are relatively easy to acquire. But, experts recommend buying an independent, individual term life insurance policy for yourself.

“Group term life insurance is generally cheaper and easy to acquire. But, it is linked to your employment.  If you quit the job, you lose your employer-provided life insurance cover,” points out Abhishek Bondia, co-founder and principal officer of SecureNow. In an individual term life insurance policy, you pay the same premium for the term of the plan. In a group policy, the premium may change every year at the time of renewal depending on the mortality experience of the insurer, he adds.

After the adverse mortality experience during the COVID-19 pandemic, group term life insurance premiums are rising and reinsurers or insurers have turned conservative while quoting FCL rates, according to Satapathy. Therefore, buying a term life insurance policy for yourself after taking into account your current insurance will boost your family’s financial security.

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