Group life to the rescue: when baby boomers start retiring, they may cause employee shortages in important positions. Improved group life benefits could keep them working or lure them back.

Even as baby boomers age, they are likely to be valued by employers. They have acquired valuable experience and skills, and there probably will be a shortage of qualified workers to replace them.

Many boomers will want or need to work to generate income during what would otherwise be their retirement years since many do not have a retirement benefit plan financially sound enough to stop working. But there is widespread concern that supply will not meet the demand, and employers may need to find incentives for more boomers to stay in the work force, or to return.

Better group life insurance coverage could become a lure, according to Carol Muncil, senior reinsurance underwriting consultant for ING Reinsurance. That is because most people who work past age 65 not only need the income, but also the life insurance. Most don't have enough insurance to replace their incomes for the benefit of those they leave behind.

Older Ages, Higher Premiums

The problem is that life insurance becomes much more expensive for people of retirement age. That means employers may be challenged to pay for greater benefits than they do now. Current age-discrimination laws provide guidelines that allow employers to reduce benefits of older workers while being protected from lawsuits.

Muncil, however, believes insurers and employers can work together to enhance life coverage for older workers in three major ways:

* Remove or liberalize age reductions;

* Increase life offerings to retired employees; and

* Extend group life insurance waiver-of-premium benefits so that employees can retain coverage while retired.

The Age Discrimination in Employment Act of 1967 limits how much an employer can reduce benefits to employees over age 60. These reductions must be actuarially sound so that the premium due is equal to the premiums of insureds under age 60, Muncil said. Most current plan designs reduce coverage for insureds over age 65 to 65% of the original amount and to 50% for insureds over age 70, she said.

Any adjustments in plan design will be a question of supply and demand, Muncil said. "The fact that employers want employees to work and continue to have a full supply of experienced workers means they will need to make benefits more attractive to them," she said.

Anti-Selection, Taxes

Since such plan designs would represent a liberalization of current law, no new enabling legislation would be required. But Tom Corcoran, a principal of Towers Perrin and a consultant in the firm's Tillinghast business, said insurers would have to work out potential anti-selection problems. "If there are enough people, you can afford to issue it on a guaranteed-issue basis because you're getting a spread of people," he said. "That works best when you have a large number of people and coverage on any one person isn't that expensive. But if you start to get people age 75 or 80, their percent of the risk could get pretty big."

What the anti-selection problem means is that insurers probably won't write guaranteed-issue coverage on groups with fewer than 50 members if one of the employees is 75 years old, Corcoran said. Instead, insurers would probably want more information about the group of employees. But he added that there is "no simple rule" insurers are likely to follow in underwriting groups with older employees.

Providing more coverage would cost employers, but would also cost employees. Under current law, employees do not pay federal tax on premiums paid by their employers for face amounts up to $50,000. Premiums paid for amounts in excess of $50,000 are subject to tax as imputed income. For younger employees, imputed income is not a major consideration because group life is relatively inexpensive. But for older employees, imputed income could become an issue, said Susan Sames, a Tillinghast senior consultant in group life. "If you're older, and you're an active employee, you wind up with significantly more imputed income because the coverage is worth that much more," she said. In fact, companies often give employees the option of electing no more than $50,000 of coverage.

"That is enough for a lot of people," said Corcoran. "It seems kind of funny to say you can't accept a gift because of the income tax, but that's essentially it."

Guaranteed-Issue Concerns

Group life plans are paid either by the employer or the employee. The most common is employer paid, and the vast majority of employee-paid insurance is for coverage in excess of a base employer-paid plan, according to Corcoran. Only a few plans are 100% employee paid, he said.

Where employers and insurers could rtm into discrimination issues is when older workers seek new access to a guaranteed-issue plan, Corcoran said. This could occur when an older person changes jobs and becomes a new employee; when an existing, aging employee seeks to join a plan for the first time; or when an aging employee wants to add to his or her coverage. "There may be some reluctance on the part of insurers to accept those people on a guaranteed-issue basis," Corcoran said. "Anti-selection could be greater there. People know when they're ill, and you're not necessarily getting the spread of risk."

To some extent, insurers in these circumstances might be stuck from a point of view that they issued the plan, and the plan says that anybody who gets hired is eligible for group insurance on a guaranteed-issue basis. "I don't believe you can have a different underwriting rule for new entrants based on age, for instance," said Corcoran. "I'm pretty sure that would be illegal." But legality may vary from state to state, he added.

If insurers must accept older workers and there is anti-selection, insurers would probably have to factor the new experience into future rates, Sames said.

Small-Group Discrimination?

Ultimately, providing group life insurance to older workers may raise issues not about age discrimination, but about writing coverage on smaller employee groups. If the rules require insurers and employers to include the elderly on the same basis as everybody else, they may decide that they cannot afford small groups at all, at least on a guaranteed-issue basis, Corcoran said. Under the process of experience rating, the credibility of the experience is greater with a larger group. For example, the rates for a 5,000-member group may be based from 80% to 100% on the actual experience, said Corcoran. But for a 500-member group, perhaps only 10% or 15% of the rate would be based on experience. "If you have a 10-life group, and you have a claim, it's just bad luck," he said.

Providing and increasing life insurance coverage to employees when they retire is another option for employers wanting to retain or attract older boomers. Employers that offer such coverage today generally provide a death benefit of $30,000 to $40,000, Muncil said. Executives typically have more through pre-funded policies.

Some employers currently provide a fully paid base plan plus an option for employees to buy more coverage. Muncil said this is a popular trend for employees of all ages. Most people attracted by the option tend to have higher needs for income replacement, led by those in their 20s. But the group that ranks second in buying voluntary add-on coverage is baby boomers who are not financially prepared for retirement and need income-replacement protection, she said.

Side-Fund Contributions

Corcoran said that the way an employer sets up this type of plan is to offer a group universal life or group variable universal life plan for the basic benefit, and employees make a side-fund contribution to build up a cash value. The two accounts are almost independent, he said. But employees contribute very little money to the side fund because there are usually better options, said Corcoran. "Investing in an insurance side fund is good for people with a lot of money and who have used up all of their 401(k) options and all the rest," he said. "Unless you're doing quite well, things like excess 401(k) contributions have an even better tax advantage than a side fund in an insurance plan. And often you get employer matches, and there are no loads. So the GUL is not quite what it appears to be. In most group plans, 90% of the people just buy the term insurance.... There's no compelling reason for an elderly person to think that [a side fund] is a good deal."

Tillinghast's Sames said the product was really designed for young people to put money into the side fund so they essentially have paid-up insurance by the time they retire.

According to Muncil, group UL and VUL have not been popular because the side funds pay relatively low interest rates and because rank-and-file employees can't afford the premiums. But she said they might become more popular in the future if they have port provisions allowing employees to use the cash values to buy annuities for retirement income.

Insurance During Retirement

Muncil's third idea to enhance group life coverage is to keep in force waiver-of-premium benefits into a plan member's older age. Most group life policies terminate at age 65 or if the retiree goes back to work. Prices for increased-waiver reserves are not significantly higher, so employers may look with favor on the idea, she said. "Once people are considered totally disabled, they know they'll get the death benefit," she said. "So it's almost a retired life benefit in some other way." Employer groups are already asking insurers to not be as stringent on age reductions, she said.

Boomer employees also may influence employers and insurers to make other changes, such as making part-time employees and workers with flexible working schedules eligible for group life and allowing the porting of group insurance for an indefinite period. She also said workers may become more interested in riders on group insurance that provide long-term care, critical-illness or elder-care coverages.

Flexible Hours

A survey of executives by the Society for Human Resource Management and the AARP recently found that 21% are planning to use flexible schedule hours to address any worker shortages. These employees could be defined on policy benefit pages as a special class of workers, Muncil said. Plan designs for them could be based on earnings or on the same benefit amounts for each employee. Alternatively, the benefit amount could change depending on employee classification.

The current eligibility norm to qualify for group life is a minimum of 30 hours a week, though some employers negotiate that figure down to 20 hours, according to Sames. The larger the group, the more room employers would have to negotiate, with groups of 500 or more probably having sufficient leverage, she said. Insurers, however, would probably not cover seasonal workers, she said. Covered employees would have to have a regular work schedule.

Porting Group Benefits

Porting of group term insurance already has started to become popular, Muncil said. As recently as the 1980s, the only choice workers had when leaving a job was through conversion to a whole-life policy, which was very expensive. With the emergence of porting the group-term product, departing workers have been able to carry the same benefits and provisions as they had at work. "Boomers would like that," Muncil said. "It would be available without evidence of insurability, and pretty much at the same group term rate."

Coverage Add-Ons

Riders providing coverage for long-term care, critical illness or elder care would probably become available on a voluntary basis, said Muncil. Employers, already burdened by rising health insurance costs, would be unlikely to accept additional premium outlays, she said.

Corcoran predicted that LTC riders may become popular, but more on individual UL than on group UL. "Where this makes sense is where you have people investing in the side fund to pay LTC premiums, and we haven't seen that being popular yet," he said. "We have a long way to move before the market is enthusiastic about that."

Corcoran said LTC riders might become popular if employees in their 40s start making side fund contributions as opposed to people in their 60s making contributions to do something in their 70s. "Once you reach that age, you're probably better off just buying a policy," he said.

Key Points

* Due to a looming worker shortage, employers and insurers may work in coming years to offer better group life insurance to baby boomers.

* Existing law already allows insurers and employers to boost group life benefits for older workers, but not if the increase discriminates against other age groups.

* Group writers could face anti-selection issues that cause them to cut back on guaranteed-issue.

Aging Work Force Facts

* By 2012, nearly 20% of the total U.S. work force will be age 55 or older, up from less than 13% in 2000.

* 58% of human resources managers responding to a 2005 AARP survey said it is more difficult now than five years earlier to find qualified job applicants.

* 69% of people ages 45 to 74 who are working or looking for work plan to work in some capacity during so-called retirement.

* The benefits of a stable work force and avoiding turnover cost can exceed the incremental compensation and benefit cost for a 50+ worker.

Source: The Business Case for Workers 50+: A Report for AARP Prepared by Towers Perrin, December 2005.

Another View

Not everyone agrees that group life is an attractive benefit to offer older workers when and if an employee shortage strikes. "We don't see it," said Donna Kinnaird, president of Swiss Re America Life & Health Inc. Instead, the reinsurer sees interest in guaranteed income, health insurance, and living benefits such as long-term care, elder care or critical-illness insurance. "We attribute these shifts in demand to the aging population," said Kinnaird. "Of course, supply-and-demand factors will affect the choices employers make."

But Kinnaird doubted that group life would be an important factor in whether an older employee would continue to work.

Kinnaird said in a group situation, the amounts an employer spends on benefits have to be equitable for all employees across the board due to anti-discrimination laws. "So I struggle with whether an employer can afford to offer the entire population a significantly enriched life-insurance benefit to attract the older ages."

Kinnaird said they might offer a voluntary plan so that every employee, regardless of age, would have the opportunity to purchase additional life insurance amounts. Such voluntary plans "have become increasingly popular over the past 15 years," she said.

Some of these plans are individually written, and some are guaranteed-issue with appropriate under writing requirements, she said.

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The Aging Work Force

Impact on Employers
More than a third of employers
surveyed think the aging
population will have a significant
impact on their work force.

No. of Employees   (% by Company Size)

Total              34
2-9                27
10-49              27
50-999             33
1,000-4,999        40
5,000-9,999        45
10,000-24,999      49
25,000+            46

Who's Offering Benefits

Only 21% of companies surveyed
are offering resources and
programs to older workers. Of
those who do, the choices are
long-term-care referral services
and elder-care support groups.

No. of Employees   (% by Company Size)

Total              21
2-9                12
10-49              12
50-999             21
1,000-4,999        27
5,000-9,999        37
10,000-24-999      35
25,000+            33

Note: Table made from bar graph.

Size of Retirement Nest Egg

On average, today's employees
are planning for only 19 years of
retirement

(% Distribution by Current Age)

              Number of Years Planned for Retirement

Current Age   0-5   6-10   11-20   21-30   31+

21-30 yrs     25     8     24      27      16
31-40 yrs     23    11     20      29      18
41-50 yrs     18    13     38      28       3
51-60 yrs     11    19     50      15       6
61-69 yrs     29     9     26      37

Source: MetLife 2005 Employee Benefits
Trend Study

Note: Table made from bar graph.