Are Your Employees Underinsured?


Last year, an employee of a GAWDA member company died at home in a tragic house fire. He had a wife and several young children. Mitigating the personal tragedy somewhat was the fact that his employer had insured his 80 employees under the GAWDA-MetLife Insurance Program at the one times earnings option. Since the plan included accidental death and dismemberment benefits, the actual benefit paid was twice the employee’s annual earnings of $24,000, or $48,000 total benefit. The employer was pleased that he had provided this employee with a benefit, which he thought would supplement the young father’s personal insurance program and ease the widow’s upcoming financial obligations for the surviving family.

Group insurance is only a supplement to personal insurance.

WRONG! It was learned that the employee, hard pressed to pay increasing health insurance premiums and payments on his motorcycle, had no other insurance. Word of this situation spread to other employees, who then became critical of management for only providing a one times earnings program. Although management countered these comments by rightly explaining that group insurance is only a supplement to personal insurance, they sensed strong unrest among the employees. To alleviate their concern, management this year increased the company’s Group Life Insurance Program to 1.5 times annual earnings.

Sufficient Coverage
The above story is not uncommon in today’s society. “The average employee benefits manager probably spends about 95 percent of each day on health care, so that group life insurance plans don’t get much attention,” observes MetLife Vice President Mike Witmer. More than one-third of working Americans with financial dependents do not have life insurance protection. Even for those with coverage, according to Witmer, “30 percent have less than one times their annual household income, which for most people is drastically insufficient.” “Underinsured” is defined as having life insurance coverage equal to or less than three years of annual income.

What is a sufficient amount of life insurance? Rules of thumb vary throughout the financial planning industry, but one common definition of “sufficient” is five to seven times annual household income. This means that for a family with two wage earners, making a total of $70,000 annual income, sufficient insurance would be in the range of $350,000 to $490,000. Perhaps $105,000 would be provided by an employer paid group plan at 1.5 times earnings, with the remainder being a personal responsibility.

This, however, does not address those employer plans that offer health insurance with a nominal $10,000 to $20,000 flat amount life benefit. These plans, which were inadequate a decade ago, should definitely be revised upward now. Employers might be surprised at how relatively inexpensive group life insurance is compared to the inflationary health and dental programs that might approach 25 percent of total payroll costs.

To enhance their benefit program, employers should also consider the inexpensive addition of dependent life insurance. It is estimated that only 10 percent of benefit programs include dependent life coverage of $10,000 for the spouse and $2,000 for each child. Lack of benefits for these dependents can be debilitating to the well-being of the survivors. Providing dependent insurance is a morale booster to round out a comprehensive employee life program.

Steps to Take
Here are what employers should do to educate employees and correct outdated benefit formulas:

  • Communicate to employees that their group insurance program is only a supplement to personal life insurance.
  • Encourage employees to periodically check beneficiary designations and amounts of personal life insurance as their family situations and responsibilities change.

Because of its relatively modest cost compared to other benefits funded by the employer, employers should reassess and perhaps upgrade their existing Employee and Dependent Life Insurance Programs to meet today’s employee needs and expectations.

Gases and Welding Distributors Association
David E. Irving Meet the Author
David E. Irving, GAWDA’s group life insurance consultant, is based in Media, Pennsylvania.