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Limiting Anti-Selection In Voluntary Group Life Programs

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Would you consider voluntary payroll deduction life insurance to be a group or an individual product?

Actually, it is a hybrid of both. High first-year commissions, employee pay all, portability and the ability to opt in or out of coverage define it as an individual product. Actively at work, usually limiting coverage to a term period and other underwriting requirements define it as a group product.

Writing such business could be dangerous if it is not underwritten properly. Consider that for a medium size group, one additional death claim per year is the difference between profit and loss. The basic danger is that a greater percentage of employees in relatively bad health will decide to buy the coverage and will buy at relatively greater amounts than those in better health. This obviously implies that claim experience will be worse than for full group insurance, where everyone participates for either a fixed amount or a multiple of salary. It will also be worse than individual insurance, where everyone is underwritten.

This does not mean that voluntary life cannot be written on a profitable basis, as long as proper underwriting and pricing controls are used to limit anti-selection. Such controls should include:

Minimum Percentage Participation. Participation requirements are likely the most important element of a voluntary life program, because unhealthy employees will opt to buy more insurance than the average employee. Therefore, the higher the participation, the smaller the percentage of unhealthy lives to the total of all participants. Minimum participation percentages usually range from 15%-30%, depending on factors such as group size and maximum amounts.

Guaranteed Issue Maximum Amounts. Maximum guaranteed issue limits are based on the size of the group and/or the percentage participation. This limits the exposure for those employees who are anti-selecting based on their health. Typically, there are 2 levels of underwriting: the simplified issue, which would involve answering several health questions and possibly ordering an MIB Report; and, secondly, full evidence of insurability, which would be required for even higher face amounts.

Enrollment Process. Because of its vital role in achieving acceptable participation levels, the enrollment process plays an important role in the potential profitability of the insurance program. Many underwriters do not focus enough attention on this aspect of the program when developing a voluntary group life underwriting manual. There are several ways that a payroll deduction program can be marketed, including Internet presentations, direct mail, on-site distribution of material, phone calls, on-site group meetings and on-site one-on-one meetings. The more direct the contact with the employee, the greater the likelihood of obtaining the sale. Marketing can result in greater sales but also greater early lapses.

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Limitations by Age. Some companies offer what is called a money purchase program, which allows an employee to deduct a weekly amount from his or her paycheck, generally varying from $4-$12/week, based on group size. This method allows younger employees to purchase greater amounts of insurance than older ones. Some companies that do not use a money purchase program may nevertheless limit insurance amounts for older employees. These underwriting guidelines limit the amount of anti-selection, as older employees are more often in poorer health.

Minimum Number of Lives. Most insurers will limit payroll deduction programs to minimum size groups such as 50 or 100 lives. Others will limit it to a minimum participation level of, perhaps, 20 lives. This is an important control, as even one person anti-selecting in a small group can skew the overall claim experience unfavorably.

Rates. Rates for voluntary life programs are always based on age or age bands. Usually, these rates are greater than for an employer-paid plan, because they include the additional cost of anti-selection. Actual rates will vary based on underwriting guidelines (as described previously), type of industry, smoker/nonsmoker status and additional benefits such as waiver of premium for disability. For a large group in a takeover situation, previous claim experience will also be considered.

Open Enrollment Period. Individual employee changes are usually allowed once a year during an open enrollment period without any underwriting. This period should be limited to a maximum of 30 days. Increases should be limited to a dollar amount or one times salary. New employees must make a decision to participate within 30 days of being hired. Limited changes in coverage, without underwriting, will also be allowed when a family status event occurs, such as marriage or divorce.

Additional Benefits. Many companies will offer other benefits alongside the life program. Such benefits may include waiver of premium, accidental death and dismemberment, long-term care and critical illness. The majority of these types of benefits should be limited to a maximum of 25% or 50% of the face amount. If these benefits are riders to the life policy, the types and amounts of the additional benefits should be chosen by the employer, not the employee, and included in everyone’s policy.

Spouse and Child Benefits. Benefits are usually offered to the spouse and child. The child benefit should be limited to a fairly low amount, such as $2,000 or $5,000. Spousal benefits should not be offered as guaranteed issue and should be limited to 50% of the employee amount.

Underwriting and rating for a group voluntary life program is a dynamic process. For example, if a company wants a liberal guideline for participation, it can be balanced by having more stringent rules for maximums or higher rates. The key to presenting a marketable program while avoiding losses is to limit anti-selection while offering competitive rates with benefits that can enhance employee needs.