In a Group Life Insurance policy, the insurer calculates the ‘free cover limit’ (FCL) for the scheme. A free cover limit is also known as the ‘Free cover level’ or ‘No evidence limit’.

A free cover limit or the no evidence limit is the amount of cover that each individual policy member can have without any requirement of medical evidence or underwriting. Thus, a free cover limit does not require any evidence of insurability from the participating employees of the scheme. A free cover limit has the ability of cost and time-saving.

Read More: Some Important Terms Used in Group Insurance Contracts and Their Meanings

Some significant factors for selecting free cover limit are:

  • The number of employees that are covered under the group insurance policy.
  • The average level of benefits among the employees.

Hence the Free cover limit levels vary according to the size of the, members in the policy and the average benefit levels amongst the members. Generally small group of employees under a group insurance schemes have a lower free cover limit levels.

The calculations of the free cover limit include:

A fixed amount of cover multiplied by the number of scheme members. So, when the group members are more, the free cover level also increases. As a result, the larger the scheme the higher the free cover level.

If a company consists of 60 employees and 50,000 rupees is the free cover for each employee, then the free cover limit comes to,

50,000*60= 30,00,000

Also, the underwriting requirements vary according to the number of members in the scheme.

  • In case of a large policy including many members, very little underwriting is required as the free cover limit is very high.
  • For medium sized policy, generally the senior management that require underwriting. This is because their level of cover inclines to be much higher.
  • But when the scheme is small, the majority of the members require underwriting.

It is important to understand that the underwriting comes into play when the amount exceeds the free cover limit. In the case of underwriting, the insurer requires age and amount underwriting evidence. For younger members of the group insurance coverage, a health declaration or short questionnaire is required.  For older members of the scheme, the requirements for the underwriting process may slightly become more comprehensive. Such requirements may include the full medical and financial underwriting.

The group insurance plans may be compulsory ones or participating types. Since the employer pays the full premium in case of the compulsory plan, they are much easier to follow. In the case of participating plans, the employee has to contribute some amount to the premium, and the minimum participating limit has to be met.

Read More: How does Group Insurance Cover work?

Case Study:

JK Enterprises situated in Gujarat was a manufacturing company. The company was in operations since a decade and had a total of 85 employees.

One of the employees Mr. Kamath who was 45 years old had been working in the company since last seven years. One day, Mr. Kamath suffered an injury during his working hours in the firm. He was immediately rushed to the hospital due to extreme pain. Since the manufacturing company had obtained a group insurance policy, Mr. Kamath availed his policy to cover the medical expenses.

Now, the total number of employees in the company was 85, and the free cover limit for the group insurance policy was rupees 1 lakh. The medical expenses of Mr. Kamath were 35,000 rupees.  Hence Mr. Kamath had to only complete a medical questionnaire for underwriting.

In a case when Mr. Kamath’s medical expenses were more than rupees one lakh (free cover limit), then the insurer would have collected his health information and determined if they are able to accept him on ‘standard terms’ (with normal premiums and no policy exclusions).

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