Table 1. Life insurance provisions, full-time employees, 1993-94

{in percent)
Medium and Small ‘State and
Provision Total Sarge private Private local
establishments | establishments | governments
Number with basic life insurance (in thousands) ... 59,324 26,175 21,955 11,194
Total with basic life insurance 100 100 100 | 100
Fully paid coverage ........ 85 87 82 86
48 61 2 55
46 59 a 46
45 58 30 44
4 42 27 31
w 4 20 46
NOTE: The total is less than the sum of the individual
items because many employees are in plans with more than.
one of these provisions.
Table 2. Method of determining basic life Insurance, full-time employees, 1993-94
(npercent)
Medium and ‘Small ‘State and
Method Total farge private private local
establishments | establishments | governments
Number with basic life insurance (in thousands) .. 59,324 26,175 21,955 11,194
‘Total with basic life insurance .. 100 100 100 100
Multiple of earnings .. 45 58 32 40
multiplet. 44 58 3t 7
Multiple varies by earnings. ® ® eQ -
Multiple varies by servic © 0) © 2
55 a 68 60
52 36 67 58
ings. 3 4 1 2
Dollar amount varies by service Q i Q g
: ) 9) - -
‘Includes participants in plans in which insurance equals NOTE: Because of rounding, sums of individual items
a multiple of eamings plus or minus a specified amount. may not equal totals. Dash indicates no employees in cat-
?Less than 0.5 percent. egory.

Compensation and Working Conditions Winter 1997 50


Employee Benefits

Life Insurance

BY ANN C. FOSTER

Employers often provide benefits to survivors of deceased
employees. The most common way is through a group life
insurance plan that normally makes a lump-sum payment
to a designated beneficiary.' Data from the Employee Ben-
efits Survey show that in 1993-94, 77 percent of full-time
workers had employer-provided life insurance. Coverage
ranged from 61 percent among employees in small private
establishments (those with fewer than 100 workers) to 91
percent among employees in medium and large private es-
tablishments (those with 100 or more workers); among State
and local government employees, coverage was 87 percent.”

In 1993-94, employers paid the entire cost of providing
basic life insurance benefits for most full-time covered work-
ers (85 percent). The proportion with fully employer-paid
coverage was similar among small private establishments
(82 percent of covered employees), State and local govern-
ments (86 percent of covered employees), and medium and
large private establishments (87 percent of covered employ-
ees).3

Employee contributions are usually required when life
insurance is offered as part of a flexible benefits (or cafete-
ria) plan or in connection with a reimbursement (or flex-
ible spending) account.‘

Coverage amounts

The amount of an employee’s basic life insurance cover-
age is often determined by the fixed multiple of earnings
method. Under this method, an employee’s annual earn-
ings are multiplied by a factor of one or two and then
rounded off to the next $1,000. For example, an employee
making $29,800 is covered under a plan providing two times
earnings. The face amount of the worker’s coverage would
be $60,000 (2 x $29,800 = $59,600, rounded off to $60,000).
Under this method, an employee’s coverage automatically
increases as earnings increase.*

In 1993-94, 44 percent of all full-time employees with

Ann C. Foster is an economist in the Division of Compensation Data
Analysis and Planning, Bureau of Labor Statistics. Telephone (202) 606-

41 Compensation and Working Conditions Winter 1997

basic life insurance were in plans using the fixed multiple
of earnings method. The figure ranged from 31 percent of
covered employees in small private establishments to 58
percent of covered employees in medium and large private
establishments. (See table 2.) Half of the covered employ-
ees had life insurance protection calculated at one times
earnings, and about one-fifth had protection at two times
earnings. The average fixed multiple of earnings ranged
from 1.4 for employees in medium and large private estab-
lishments to 1.9 for public employees; for small business
employees, the multiple was 1.5.

In 1993-94, the greatest proportion (52 percent) of full-
time employees with basic life insurance was in plans pro-
viding a fixed dollar amount regardless of earnings level.
Covered employees in small private establishments and in
State and local governments were more likely to be in these
plans than covered workers in medium and large private
establishments. The average amount of basic life insurance
was similar for workers in medium and large and small
private establishments ($15,481 and $15,935, respectively);
for State and local government workers, the average was
$17,518.

Other less prevalent methods of providing life insurance
protection included fixed dollar amounts that increase as
earnings levels increase, fixed dollar amounts that increase
as length of service increases, and multiple of earnings for-
mulas that increase the multiple at higher earnings levels
or with longer tenure.

Supplemental and dependent coverage

In 1993-94, 48 percent of full-time employees with ba-
sic life insurance could purchase supplemental coverage.
The proportion of employees able to purchase additional
life insurance ranged from a low of 29 percent in small
private establishments to a high of 61 percent in medium
and large private establishments. (See table 1.) Most em-
ployees with this option have to pay the entire cost of the
supplemental coverage. Eligible employees can usually ob-
tain supplemental coverage in multiples of one to three times
annual earnings.


Dependent life insurance coverage is also available to
many covered employees. Workers with such coverage must
usually pay the entire premium. Dependent coverage is
Most often provided as a flat dollar amount, Spousal ben-
efits are usually in amounts of $5,000 or more, while ben-
efits for children are usually offered in amounts of $5,000
or less, In 1993-94, dependent coverage was available more
often to employees in medium and large private establish-
ments than to their counterparts in small private establish-
ments.

Coverage for older workers

Life insurance costs increase with age. Accordingly, many
plans reduce benefits for older workers to compensate for
these increased costs. In 1993-94, a third of all full-time
workers with basic life insurance were in plans with such
reduced benefits. Those in plans calling for reduced ben-
efits ranged from 27 percent of workers in small private
establishments to 42 percent in medium and large private
establishments.

Plans that reduce coverage frequently make their first
reduction at age 65 or 70.6 Many plans reduce coverage
only once, most often to 50 percent of the original amount.
Some plans reduce coverage in stages, for example, to 65
percent of original coverage at age 65 with a reduction to
50 percent at age 70.”

Retiree coverage
Basic life insurance often continues when a covered
worker retires. Retiree coverage was available to a third of
all workers with basic life insurance coverage in 1993-94,
For 63 percent of workers with retiree coverage, the em-
ployer paid for the full cost of coverage. Twenty-eight per-
cent of these workers paid for their own coverage and 7
percent shared the cost with their employer.* Retiree cov-
,eTage was more often available to those employed by State
and local governments (46 percent) and medium and large
private establishments (41 percent) than to workers em-
ployed by small private establishments (20 percent), When

such coverage is available, it is usually reduced at least once
during a retiree’s life?

Accidental death and dismemberment coverage

Coverage for accidental death and dismemberment
(AD&D) is also available to many workers. In 1993-94, 69
Percent of employees in medium and large private estab-
lishments had AD&D coverage compared to 48 percent of
employees in small private establishments, and 56 percent
in State and local governments. When AD&D coverage is
provided, it is almost always a part of an existing group life
insurance plan.'° If a covered worker dies as the result of
an accident, the plan provides additional benefits, usually
at an amount equal to 100 percent of the worker’s basic life
insurance. AD&D coverage may also pay benefits, usually
stated as fractions of the basic life insurance amount, for
the accidental loss of an eye or a limb.

Survivor income benefits .

Although far less common than life insurance, survivor
income insurance plans also provide benefits to a deceased
employee’s survivors. While life insurance usually provides
a lump-sum benefit, a survivor income plan generally pays
a monthly benefit to a deceased employee’s survivors. Ben-
efits may be a fixed monthly amount or may be a percent-
age of the deceased employee’s salary, for example, 20 per-
cent for a surviving spouse and 10 percent for each
dependent child. Benefits are usually paid for a limited
period, usually 24 months, but may continue until a surviv-
ing spouse marries or reaches age 65 or until dependent
children reach a certain age."!

Five percent of employees in medium and large private
establishments had survivor income benefit coverage in
1993-94, compared to | percent of small business employ-
ees and 2 percent of State and local government workers.

Survivors may also receive payments from other em-
ployer-provided plans such as defined benefit pension plans
and long-term disability insurance.!2

Compensation and Working Conditions Winter 1997 48


—ENDNOTES—

* The contract between the insurance company and the employer is usu-
ally for group term insurance. Term insurance coverage is bought for a spe-
cific time period (usually 1 year), but is usually renewable, and remains in
effect as long as premiums are paid. Term insurance has no savings feature and
does not build up cash value. Itis pure protection, with benefits paid only at
‘death. For more information, see Fundamentals of Employee Benefit Programs,
Fifth Edition, Washington, DC: Employee Benefit Research Institute, 1997.

2 See Employee Benefits in Medium and Large Private Establishments,
1993, Bulletin 2456, Bureau of Labor Statistics, 1994; Employee Benefits
in Small Private Establishments, 1994, Bulletin 2475, Bureau of Labor Sta-
tistics, 1996; and Employee Benefits in State and Local Governments, 1994,
Bulletin 2477, Bureau of Labor Statistics, 1996.

? For more information, see Employee Benefits in Medium and Large
Private Establishments, 1993; Employee Benefits in Small Private Estab-
lishments, 1994; and Employee Benefits in State and Local Governments,
1994.

‘ For more information on flexible benefits plans, see Joseph R.
Meisenheimer and William J. Wiatrowski, “Flexible Benefits Plans: a
ees Who Have a Choice,” Monthly Labor Review, December 1989, pp. 17-
23. A more detailed explanation of reimbursement accounts can be found in
‘Ann C. Foster, “Employee Contributions for Medical Care Coverage,” Com-
pensation and Working Conditions, September 1996, pp. 51-53.

5 Some multiple of earnings policies limit the amount of coverage that an
employee may obtain. In 1993-94, 52 percent of full-time employees in me-
dium and large private establishments who had multiple of eamings plans
were in plans that limited coverage. The average maximum was $263,286.
In small private establishments, 57 percent of full-time covered employees.
with multiple of earnings plans were in plans specifying a maximum, which
averaged $237,305. A lower proportion (31 percent) of State and local gov-

49 Compensation and Working Conditions Winter 1997

ernment workers in multiple of earnings plans were subject to a maximum,
which averaged $256,196.

*Forexample, the greatest proportion (54 percent) of workers in medium
and large private establishments who were in plans that reduce coverage faced
their first reduction at age 65, while 33 percent faced their first reduction at
age70. Among State and local government workers in plans with reductions,
‘equal proportions (48 percent) faced their first reduction at ages 65 and 70,
Information for employees in small private establishments was not obtained.
For more information, see Employee Benefits in Medium and Large Private
Establishments, 1993, and Employee Benefits in State and Local Govern-
ments, 1994,

7 For more information, see Stephanie L. Hyland, “Age-related Reduc-

"tions in Life Insurance Benefits,” Monthly Labor Review, February 1991, pp.

36-38, and Glenn M. Grossman, “Life Insurance Benefits in Small Establish-
ments and Government,” Monthly Labor Review, October 1992, pp. 33-35.

* The source of funding for the remaining 2 percent was unknown.

° For more information on retiree life insurance, see Margaret Simons
and Cynthia Thompson, “Life Insurance Benefits for Retired Workers,”
Monthly Labor Review, September 1990, pp. 17-21.

"® Aneatlier study using data from the 1988 Employee Benefits Survey
found that 76 percent of full-time employees with basic life insurance had
AD&D coverage, but less than 0.5 percent of employees without basic life
insurance had AD&D: . For more information, see Cynthia Thomp-
son, “Compensation for Death and Dismemberment,” Monthly Labor Re-
view, September 1989, pp. 13-17.

For more information, see David E. Ott, “Survivor Income Benefits
Provided by Employers,” Monthly Labor Review, June 1991, pp. 13-18.

” Ibid.