When it comes to providing benefits to employees with diverse needs, human resource and benefit managers often face a Herculean task. The need to offer innovative and cost-effective benefits in light of multiple years of double-digit increases in group health costs has all but eclipsed the rest of a company’s benefit programs.
Consider, for example, group term life insurance. While this product usually provides adequate coverage to a large number of employees, it often fails to meet the more sophisticated needs of a company’s executives, leaving them exposed to gaps in coverage. In response, many companies are looking for alternatives for key executives to close the gaps, but they must not break the budget for the company.
To better meet the needs of their key employees while enjoying lower group term life insurance rates, many employers are using executive group carve-out products. The carve-out concept segregates executives from the experience-rated group term life insurance plan and insures them in a separate pool-rated product. The type of risk pool is a critical consideration when designing an executive group life plan and one of the features that makes it compelling.
Many group plans, like traditional group term life insurance, are experience-rated. The rate is based on the experience (claims and expenses) and demographics of the group. Rates are reset periodically.
Executives typically are older and more highly compensated, thereby raising the costs of the group term life insurance program and concentrating the volume of benefits. The death of a single highly compensated executive in one year could “shock” the pool and yield a substantial rate increase for the entire group.
Now, consider an executive group life insurance program that is pool-rated. Executives are carved out of the experience-rated product and insured under a product with a risk pool feature, where the rates are determined based on the combined mortality experience of participants from similar groups insured by the carrier under the product, not just the single employer.
Spreading the risk of the higher amounts of insurance over insured employees from several employers can stabilize the costs for the carve-out plan. It also can stabilize the costs for the remaining employees in the group term life insurance plan. By separating key employees from those covered under the group term life insurance plan, the value of the life insurance benefit can be enhanced for both the employer and insured employees.
Deciding to design a carve-out program is the first step; finding the right product to meet your clients’ needs is next. To do so, several questions need to be considered and weighted appropriately, including:
o Does the employer currently offer group term life insurance to all employees, and if so, what is the general design of the plan? Is the insurance plan meeting the executives’ needs?
o What is the employer trying to achieve? Is the goal to enhance executive benefits to elevate recruiting and retention rates or to offer more comprehensive coverage to key contributors? Or is the employer looking to contain escalating benefits costs?
o How many executives would the carve-out group comprise and what are the demographics? Most group carriers have minimum life and income requirements. If you have a small group of executives (fewer than, say, 30) it may be more appropriate to package individual life insurance products rather than a group product.
o What needs do the executives have? Do they want increased death benefits, permanent coverage or the option of tax-deferred account value accumulation? Is the employer looking to offer a higher death benefit to key executives than currently available under the group term life plan?
o Does the employer have a target death benefit to provide to all executives or will the benefit be formula-driven (e.g., based on salary)? Would the employer consider paying higher premiums to increase account value for the key employee?
By answering these questions you will be well on your way to designing a plan that will help your clients optimize their benefits spending. Using an executive group life insurance product, your corporate clients can offer their executives a greater death benefit than is available under a group term life insurance plan, lifetime coverage that is portable upon separation from the company, and opportunities for account value accumulation on a tax-deferred basis.
Best of all, these enhancements might not add significantly to the client’s benefits spending. In many cases, the addition of the group carve-out can be cost-neutral.
In short, a group executive carve-out approach can enable employers to deliver good benefit news to their key executives, without compromising the bottom line.
John Laprade is manager of group variable universal sales, large corporate markets, at MassMutual, Springfield, Mass. He can be reached at firstname.lastname@example.org.