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Employer-sponsored life insurance: a new look.

Employer-sponsored life insurance: a new look

For the first time, the Bureau of Labor Statistics derives average amounts of life insurance coverage for full-time employees of medium-sized and large private firms

Employer-sponsored life insurance is an important source of survivor protection for working men and women. Benefits are available both to assist with immediate expenses and to make up for the loss of family income. Amounts of life insurance benefits can vary widely. As one example, white-collar workers more commonly receive benefits based on their salary, while blue-collar workers are more likely to receive a fixed-dollar benefit. This difference is pointed up in a new analysis, which looks at average life insurance amounts derived from all benefit formulas.

In 1988, 92 percent of full-time employees of medium-sized and large private firms participated in life insurance plans financed wholly or partly by their employers. Insurance protection at 10 years of service ranged from an average of $20,020 if earnings were $15,000 a year to $54,440 if earnings were $55,000. On average, amounts of insurance rose only slightly with length of service. Thus, at 30 years' seniority, benefits averaged $20,161 and $54,581 at the aforementioned earnings levels.

These findings are from an analysis of insurance plan provisions obtained through the Bureau of Labor Statistics' 1988 Employee Benefits Survey. Data were collected from U.S. private firms employing at least 100 workers. The survey, which did not include Alaska and Hawaii, used a sample of 2,493 establishments that represented almost 107,000 firms with more than 31 million full-time employees. Data are presented for all types of workers combined and separately for three broad occupational groups: professional and administrative, technical and clerical, and production and service workers. The first two groups together are often labeled white-collar workers, in contrast to the blue-collar production and service workers.(1)

The Bureau has been reporting on the incidence and characteristics of employer-sponsored life insurance plans since the inception of the Employee Benefits Survey in 1979. Included in its reports are tabulations on methods of determining basic life insurance (for example, percent of participants covered by earnings-based versus flat-dollar-amount benefit formulas) and on amounts of insurance available under various plans (such as the percent of workers covered by plans providing $5,000 or $10,000 of coverage).

This article reports on the first effort to utilize the data on plan provisions to derive information on average amounts of life insurance available to full-time employees, regardless of the formula used to compute benefits. Given the specific ages, salaries, and lengths of service incorporated in the analysis, the results provide a comprehensive measure of the life insurance protection provided by medium-sized and large private firms.

Type of analysis

To conduct the analysis, a computer model was developed that takes account of the variables that influence benefits under individual life insurance plans, such as salary and, in some instances, length of service. In addition, the model applies provisions for minimum and maximum benefits and rounds protection amounts as specified by the plan.(2) The model also factors in age-related benefit reductions, allowing review of the insurance available to older workers.

In performing the analysis, life insurance benefits were projected under the provisions of each insurance plan for employees at various assumed annual salary levels and lengths of service. Benefits were computed for an employee in mid-career (for example, age 40) and for older employees.

The same assumptions were applied to all three occupational groups studied, even though some of the salary levels would not be widely applicable in each group. That is, it is not likely that many production and service workers had a salary as high as $55,000, nor is it likely that many professional and administrative workers had a salary as low as $15,000 or $20,000, in 1988. Because benefit formulas may be designed for a specific group of workers having a known range of earnings, benefits shown at these unlikely earnings levels may not be meaningful. Hence, in examining the results of this analysis, one should focus on benefits at earnings levels that are appropriate for a particular occupational group.

Benefit levels

Table 1 shows the average life insurance amounts at the length-of-service and salary levels studied. In each occupational group, the benefit amount increased only slightly with service, yet rose significantly as salary increased. This is expected, as plans frequently base benefits on earnings and rarely on length of service.(3) White-collar workers had the greater average benefit available at all salary levels, with the disparity widening with increasing annual salary. Thus, at $15,000, white-collar benefits were 44 percent higher than blue-collar benefits, while at $35,000, they were 55 percent higher.

Average life insurance amounts for white-collar workers were more sensitive to salary changes than were those for blue-collar workers. For example, when salaries of white-collar workers increased 80 percent, from $25,000 to $45,000, average insurance benefits increased 60 percent. For blue-collar workers, the increase was 50 percent over the same salary range. The analysis for blue-collar workers in the upper salary ranges, though, may be skewed due to the aforementioned assumptions regarding the inapplicability of higher earnings to this occupational group. Over the lower applicable salary range of $15,000 to $25,000, when salary increased 67 percent, insurance increased 44 percent.(4) In any event, one would expect greater sensitivity of white-collar workers' insurance to salary changes because in 1988 nearly 80 percent of the white-collar participants in medium-sized and large firms had life insurance tied to earnings, compared with 50 percent of the blue-collar participants.

With life insurance benefits expressed as a percent of employees' annual salaries, average benefits for white-collar participants were always greater than annual salary, while for blue-collar participants that was true only at the lower salary levels. The following tabulation presents projected life insurance benefits as a percent of annual salary at 10 years of service:
 Annual salary
 Participants $15,000 $25,000 $55,000
 All plans 133 119 99

Professional and
 administrative 160 143 123
Technical and clerical 145 134 116

Production and

service 111 95 74

As shown in table 2, dollar amounts of protection at any one salary level varied widely among the individual life insurance plans in the survey. Nevertheless, clusterings are apparent, reflecting the prominence of plans paying benefits equal to the annual salary or flat amounts such as $5,000, $10,000, and $20,000.

Life insurance for older workers

The Age Discrimination in Employment Act prohibits employers from discriminating against any person with respect to hiring, compensation, or

privileges of employment based on the person's age. Originally, the Act protected individuals between ages 40 and 65, but as amended, it now applies to all employees 40 years of age or older.

One effect of the Age Discrimination in Employment Act is to ban mandatory retirement. Because of this, employees may choose to continue working past typical retirement age. For such employees, the cost of employer-sponsored life insurance may continue to increase, as the life expectancy of older workers declines. To compensate for this added cost, many employers have reduced the amount of life insurance protection afforded these workers.(5)

Life insurance provisions for older workers varied widely in medium-sized and large private firms. In 1988, plans covering 56 percent of full-time participants imposed benefit reductions for older workers. The amount of insurance was first reduced at age 65 in plans covering 57 percent of those participants with age-related reductions, at age 70 for 32 percent, and at other ages for the remaining 11 percent. A slight majority of the participants in plans specifying age-based benefit reductions could expect a single reduction in insurance; the remainder could expect more than one benefit decrease. A common arrangement in plans with multiple reductions was to lower benefits to 65 percent of prior coverage at age 65 and to 50 percent at age 70. White-collar participants more commonly were in plans with age-based reductions than were blue-collar workers.(6)

Coverage for employees ages 65, 70, and 75 with 10 and 30 years of service is shown in table 3. As in table 1, there is little variation in benefit amounts based on length of service, and benefits still increase as salary increases. More significant is a 12- to 14-percent drop in protection at age 65 from comparable pay and service amounts unreduced by age provisions.(7)

As table 3 shows, the decline in benefits was most prominent after age 65, particularly between ages 65 and 70. Over this 5-year span, insurance amounts dropped 22 to 25 percent, depending on length of service and salary; between ages 70 and 75, the decline was 5 to 7 percent.

Table 4 presents the distribution of life insurance benefit amounts for older workers at the $15,000 and $35,000 salary levels. Prior to age-based reductions in coverage, 15 percent of participants at the $15,000 salary level had life insurance coverage of less than $10,000 (table 2). At age 65, however, 25 percent of plan participants had coverage of less than $10,000. The percent of employees who had less than $10,000 coverage continued to increase to 43 percent at age 70 and 48 percent at age 75.

At the $35,000 salary level, the percent of plan participants with less than $10,000 of coverage is lower than at the $15,000 level and does not rise as sharply as age increases. Only 13 percent of employees received these low benefits prior to age-related reductions, the figure increasing to 20 percent at age 65, 26 percent at age 70, and 30 percent at age 75. For purposes of comparison, the percent of employees earning $35,000 and having life insurance benefits of $70,000 or more fell from 22 percent prior to reductions to 6 percent at age 75. [Tabular Data 1 to 4 Omitted]


(1)Excluded from coverage in the survey are benefits for executive management, part-time, seasonal, and temporary employees, as well as for employees who are on regular travel assignments (such as airplane crews and long-distance truckdrivers). In addition to life insurance, the survey examines the incidence and detailed characteristics of health care, short- and long-term disability insurance, retirement, and capital accumulation plans, and a number of paid and unpaid time-off items. It also reports on eligibility for a variety of other benefits. Key findings of the 1988 survey are in Employee Benefits in Medium and Large Firms, 1988, Bulletin 2336 (Bureau of Labor Statistics, 1989). (2)Provisions for maximum amounts of insurance, designed to limit benefits that are tied to earnings, are more common than provisions for minimums. Formulas providing benefits expressed as multiples of earnings (such as one or two times annual salary) commonly stipulate rounding rules; insurance amounts are most often rounded to the next higher thousand dollars. (3)In 1988, 58 percent of life insurance participants in medium-sized and large firms were provided with a basic benefit expressed as a multiple of their earnings, and an additional 7 percent derived their benefit from a graduated schedule based on earnings. Of the remaining participants, 31 percent were provided with a flat benefit amount and 3 percent with a flat benefit based on service. (4)Data from the Bureau's Employment Cost Index show average hourly wages and salaries of $11.84 for white-collar occupations in 1988, compared with $9.59 for blue-collar occupations. See Employment Cost Indexes and Levels, 1975-1988, Bulletin 2319 (Bureau of Labor Statistics, 1988), p. 48. (5)Prior to June 23, 1989, reductions in life insurance benefits for older workers were governed by guidelines established in the U.S. Department of Labor's 1979 interpretive bulletin (29 CFR 860.120). These guidelines allowed benefit reductions if justified by increased costs. On June 23, 1989, the Supreme Court, in Public Employees Retirement System of Ohio v. Betts, ruled that the Department of Labor's cost-justification guidelines were invalid. Data in this article reflect life insurance plan provisions in effect prior to this ruling. (6)For further information on age-related reductions in life insurance, see Michael A. Miller, "Age-related reductions in workers' life insurance," Monthly Labor Review, September 1985, pp. 29-34. (7)Table 3 includes all plans in the survey. For those without age-based insurance reductions, the inputs are the same as those for table 1. The differences between the two tables would be greater if each were restricted to plans calling for age-related reductions in life insurance benefits.

Adam Z. Bellet is an economist formerly in the Division of Occupational Pay and Employee Benefit Levels, and currently in the Division of Foreign Labor Statistics, Bureau of Labor Statistics.
COPYRIGHT 1989 U.S. Bureau of Labor Statistics
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Author:Bellet, Adam Z.
Publication:Monthly Labor Review
Date:Oct 1, 1989
Previous Article:Employer provisions for parental leave.
Next Article:United Auto Workers 29th constitutional convention.

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