Market Characteristics | VOLUNTARY BENEFITS

The voluntary market is very diverse. The remainder of this section briefly describes some of the variations.

Insurance Company Involvement

It is estimated that between 150 and 200 insurance companies offer voluntary benefits, with the number of companies offering individual products being about double the number of companies offering group products and with some companies offering both individual and group products. For a few companies, 50 to 100 percent of their premium income is from voluntary products. For the majority of companies, the figure is under 10 percent.

As a general rule, individual carriers tend to target employers with fewer employees than do group carriers. However, many insurance companies will provide coverage for the employees of almost any size employer. Most companies target employees in the middle income range.

Types of Products Available

The major goal of most insurance companies in the voluntary market is to sell life insurance to employees and their dependents. Individual carriers are heavily concentrated in this market. Life insurance is also the most popular product of group carriers, but they are more likely to also offer health insurance products.

Life insurance products run the gamut from basic term insurance to variable universal life insurance and include accidental death and dismemberment insurance. The most prevalent health insurance products are short-term and long-term disability income. Major medical coverage is seldom offered, but some insurance companies sell specified-disease policies and hospital-indemnity coverage. Dental insurance, prescription drug coverage, and vision coverage are also found, usually in the group insurance market. An increasingly common product is long-term care insurance. A few companies also write property and liability insurance.

Depending on the size of the employer, group products can be tailored to the employer's needs. In the individual marketplace, some providers of voluntary products sell the standard products that are listed in their rate books. Other carriers have specialized products for this market. This is common for universal life insurance and among companies that specialize in voluntary benefits.

Underwriting

Surveys of both employers and employees indicate that the success of a voluntary benefit plan is affected by insurance company underwriting. Although some voluntary benefits are individually underwritten, most plans are responsive to market demands and use either simplified underwriting or guaranteed issues, with group coverage being more likely than individual coverage to have the latter. As a general rule, employers want guaranteed-issue coverage unless simplified underwriting will result in significant cost savings to employees. Several factors affect the underwriting policy of an insurance company, including size, participation level, and issue limits. For example, an insurance company might use simplified underwriting for its universal life product if there is a minimum 8 percent participation rate among employers with 500 employees and the issue limit is $100,000. For a group of 50 employees, the percentage might be 15 and the issue limit, $85,000. For guaranteed issue, the figures might be 35 percent and $80,000 for employers with 500 employees and 55 percent and $50,000 for employers with 50 employees.

Cost

It is estimated that voluntary benefits are about 10 percent less expensive than coverage purchased in the individual marketplace outside the employment relationship. However, significant variations exist. Even when there is no cost differential, the ease of payroll deduction is appealing to employees.

Because both employers and employees have considerable interest in voluntary products being offered on a tax-favored basis, benefits may be provided under a cafeteria plan. However, the use of a cafeteria plan may pose problems, and some benefit consultants feel that voluntary benefits should be kept separate from a firm's cafeteria plan. The issue arises over regulation by ERISA. Most voluntary plans, being employee pay all, are exempt from ERISA rules, which is a definite plus from the employer's perspective. Any benefits purchased under a cafeteria plan are technically purchased with employer funds, even if made with voluntary salary reductions. It is argued that this would bring a voluntary benefit plan under ERISA rules. In 1996 the Pension and Welfare Benefits Administration issued an advisory opinion that ERISA did not apply to premium-conversion plans (also called premium-only plans) used to allow before-tax salary reductions for medical expense benefits. However, the government has not addressed the issue of other voluntary benefits.

Methods of Premium Payment

The vast majority of voluntary benefits use payroll deduction (also referred to as salary allotment or salary reduction) as the method for premium payments, with the employer remitting the premiums to the insurance company. Some insurance companies will bill employees directly if an employer is unwilling to participate in a payroll deduction arrangement. Payroll deduction is very popular with employees, however, and direct billing will probably have an adverse effect on plan participation, although it may also reduce the rate at which coverage lapses when employment terminates.

Premiums are usually determined by the benefits purchased and the frequency of payroll deductions. However, life insurance is often sold on a money-purchase basis. The term money purchase comes from the fact that amounts of coverage are sold on the basis of what can be purchased with a given premium, such as $1, $2, or $5 per week (or other period). Because the amount of coverage is a function of the employee's attained age, larger amounts of coverage are available to younger employees than to older employees.

Some insurance companies sell universal life insurance on a money-purchase basis, but other companies take a different approach. Rather than selecting the desired premium, employees choose the amount of pure death protection. Several options—such as $10,000, $25,000, and $50,000—may be offered, and the available options may vary by salary level or position. A minimum periodic premium will then be specified for each option and a given employee's age. The premium will be sufficient to generate a cash value at retirement age if the insurer's current interest assumptions are met. Employees, however, can elect to pay higher premiums so that a larger cash value will develop. Some insurers set the initial premium at a multiple of the pure insurance cost (such as twice the cost); others make it an amount that will generate a cash value equal to a percentage (such as 50 percent) of the original amount of insurance. After the policy has been in force for a specified time period, employees typically have flexibility in premium levels similar to what is available to persons purchasing universal life insurance outside the employment relationship.