What distinguishes a contributory group life insurance plan from a noncontributory plan?

Why A is correct

A contributory group life plan is one in which the employees contribute toward the premium, with the employer typically paying the balance; a noncontributory plan is one in which the employer pays the entire premium. Because employees have a financial stake in a contributory plan, insurers generally require that a substantial percentage of eligible employees participate, to avoid adverse selection — otherwise, only employees who expect to need coverage might enroll. In a noncontributory plan, where the employer pays 100 percent, all eligible employees are automatically covered, eliminating the selection problem.

Why the other options are wrong

• B) The relationship is reversed: contributory means employees contribute to the premium, while noncontributory means the employer pays the entire cost. A contributory plan therefore involves cost sharing.
• C) Evidence of insurability requirements relate to enrollment timing, group size, and the amount of coverage requested. They are not determined by whether the plan is contributory.
• D) The benefit size is set by the plan design and schedule of coverage. It is not determined by whether employees share in the premium cost of the plan.

Memory hook

Contributory = employees chip in, so most must enroll. Noncontributory = employer pays all, everyone's in.

Why B is correct

In a contributory group life plan, employees pay a share of the premium through payroll deduction. Because participation is voluntary, the insurer typically requires that a minimum percentage of eligible employees enroll — commonly around 75 percent — so that the risk pool is broad enough to avoid adverse selection. Employees who delay enrollment beyond the initial period may be required to provide evidence of insurability. In a noncontributory plan, by contrast, the employer pays the entire cost and all eligible employees are automatically covered.

Why the other options are wrong

• A) Paying the entire premium with no participation requirement describes a noncontributory plan, not a contributory one.
• C) Late entrants in a contributory plan often must prove insurability; enrollment is not open at any time without evidence.
• D) Dependent coverage is optional and typically requires an additional contribution; it is not automatic and free.

Memory hook

When employees chip in, the insurer sets a minimum turnout.

Why A is correct

Because contributory plans depend on employee premium payments, insurers generally require that a minimum percentage of eligible employees participate so that the risk is spread broadly and adverse selection is limited. Eligible employees who do not want coverage are usually asked to sign a declination so the employer can demonstrate that coverage was offered to everyone eligible. In contrast, a noncontributory plan, where the employer pays the full cost, typically covers all eligible employees automatically without any employee contribution. The minimum participation requirement protects the insurer from adverse selection within the group.

Why the other options are wrong

• B) Employees can decline contributory coverage; signed declinations are a normal part of the group enrollment process. The signed declination form documents that coverage was offered to and declined by the eligible employee.
• C) Contributory means the employees share the cost; the employer paying the entire premium describes a noncontributory plan. Declining is a protected choice, and no employee is forced to accept contributory coverage.
• D) Group plans must cover broad eligible classes of employees and avoid discrimination; participation is not limited to management. When the employer pays the full premium, the plan is noncontributory and typically covers all eligible employees automatically.

Memory hook

Contributory = employee pays a share, minimum participation required, declinations signed. Noncontributory = employer pays all.

Why A is correct

In a contributory group life plan, both the employer and the covered employees contribute to the premiums; the employees' share is typically deducted from their pay. Contributory plans generally require that a substantial percentage, commonly at least 75 percent, of eligible employees participate to avoid adverse selection. In a noncontributory plan, by contrast, the employer pays 100 percent of the premium and all eligible employees must be covered. The distinction between contributory and noncontributory affects participation requirements and enrollment rules.

Why the other options are wrong

• The employer paying the entire premium describes a noncontributory plan, not a contributory one in which employees also contribute. This choice does not fit the arrangement described in the question, so it is clearly not the right option to choose.
• Group plans cover employees under a master policy with certificates; each employee does not receive a separate individual policy. Accordingly, this option is not correct because it does not match the specific rule or product that is described in the question.
• Eligibility for group life is based on employment, not age; there is no age-65 participation rule for coverage. This option therefore does not match the facts presented in the question and is not the correct answer to select.

Memory hook

Contributory means employees chip in, and usually 75% must join.