How do you offer better life insurance benefits for key employees while holding down costs for all employees? One solution is to “carve out” the top executives.
Sometimes, you read articles that make carve-out plans sound as if they are simply vehicles for giving executives better benefits. In the group life market, theres more to it than that.
Most employers with good benefits packages offer their employees group term life insurance. Group term life is easy to implement, administer and understand.
One key aspect of group term life is that the rates are determined based on the overall mortality experience of the group. “Experience rated” means that all insured employees in the group are in the same risk pool and that claims will adversely affect the rate for the entire group.
When it comes to the executive population, average ages, incomes and amounts of insurance tend to be higher, and that often dictates the pricing for the entire group term plan.
In a case like this, carving out the top executives and putting them in a separate pool-rated product can improve the situation of everyone involved.
Placing the top executives in a separate group policy where the rates are determined based on the mortality experience of the entire pool of participants potentially can keep costs in check. Spreading the risk of the higher amounts of insurance over insured employees from several employers can stabilize the costs for the carve-out plan as well as the group term life plan for the remaining employees. By separating the key employees from the remainder of the group, the value of the life insurance benefit is enhanced for both the employer and insured employees.
One type of pool-rated life insurance program, which is marketed effectively by some carriers, is group universal life insurance. GUL plans, as their names imply, are first and foremost permanent group universal life insurance plans designed to insure and protect the executives financial future.
In most GUL plans the employer pays premiums to cover the cost of insurance as they would in a group term life plan. In more generous plans, the employers use bonuses to cover the cost of additional premiums for the key employees to increase the certificates account value.
While creating some level of current income for insured executives, the benefits and flexibility of these programs make them attractive options.