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November 26, 2006 at 02:00 PM
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.
