4.5 minute read
For public sector employers, offering retiree life insurance as a post-employment benefit is a generous and common offering, but may be problematic for the employer as time goes on. As the large baby boomer generation ages, and as more and more retirees stay on your life insurance plan, a situation occurs called implicit rate subsidy.
Implicit rate subsidy simply means that your younger employees are subsidizing the cost of insurance for the older employees. As the employees on the plan age, the risk to the insurance carrier increases. This translates into higher and higher premiums for the employer. Eventually, the rates will become unsustainable and the group may have a hard time finding a carrier to quote their current coverage.
To keep rising costs in check, some public sector organizations have been playing insurance carrier roulette: moving from carrier to carrier, securing multi-year rate guarantees, etc. But this just delays fixing the problem, and it will eventually need to be addressed.
If you are lucky enough to work with a broker who is keeping tabs on the situation, you are probably making proactive changes to your plan to help shrink your liability. One Wisconsin school we work with is finding out that getting a quote with retiree coverage is getting increasingly more difficult. At renewal time, their current carrier gave them an increase. Wanting to see if they could get a better deal, we shopped the market and sent their request for proposal to 14 different carriers. Twelve carriers declined to quote. Only two submitted rates, both with significant increases.
Here are some tips on how to manage your liability:
- Consider eliminating new retirees on the plan. Many employers are aware they have a liability issue but continue to add new retirees. Adding new retirees will only compound your liability. What if your implicit rate subsidy issue becomes an even larger issue? What if your plan’s rates keep increasing and you no longer can find an insurance carrier who wants to provide a quote?
- Perform a Retiree Obituary Search. Do you know if all the retirees on your plan are still alive? You might not receive notice when retirees pass. Consider establishing a best practice of searching the internet for obituaries from time to time or contact your broker/consultant to see if they have any audit resources to assist.
- Amend Your Contract Language. You could modify your life insurance contract by adding age termination language or more aggressive age reductions for your retirees. This will help to decrease the number of retirees on your plan (when they hit certain ages) or at least it will reduce the amount of coverage they’ll receive as they age. For example: “Retiree life insurance reduces to 75% at age 65, to 50% at age 70, to 25% at age 75, and terminates upon your attainment of age 80.”
- Break Out the Retiree Risk. Retirees are a significant cost driver. The age-related cost for a typical retiree’s coverage is always higher than the average active employee, so your entire plan cost increases to subsidize the retirees. Consider requiring the retirees to pay for a portion or the total cost of their retiree coverage. Or you could look at breaking out or increasing the retiree rate(s) to put more of the cost on the increased risk.
- Look into insurance buyouts. There are two types of buyouts: direct buyout or insurance carrier buyout. Note that both options are extremely expensive, but many employers have successfully implemented them.
- Direct Buyout. You can directly buyout your retirees with a cash offer in lieu of life insurance. Let’s say Jane has $15,000 in life insurance. Her school district offers her $3,000 in cash for a buyout. Jane has individual life insurance as well, so she views the offer as extra money she could use for a vacation or add to her savings. Jane decides to take the cash buyout and forfeit her retiree life insurance. (Note that the payout amount would be taxed.) Retirees who elect to take the buyout will help shrink the employer’s liability.
- Buyout with the Insurance Carrier. With an insurance carrier buyout, the employer would pay a lump sum directly to the insurance carrier. The carrier would then take on all the employer’s risk and some will also take on the administration of the plan as well.
One school district we work with elected to do an insurance carrier buyout with their 21 administrators. The administrators had been promised by the district that they would receive coverage for their entire lifetime. The one-time premium to buyout the risk cost the district $370,000.
Life insurance is an important benefit but many times it is overlooked or paid minimal attention because it falls into an ancillary or secondary category. Is your broker/consultant reviewing the retiree risk and potential liabilities that can be affecting your plan? For more information about retiree life insurance liability, contact your NIS Representative.