Growth of employer-sponsored group life insurance

Monthly Labor Review, Oct, 1991 by Michael Bucci

Since it was first offered 80 years ago, employer-sponsored group life insurance has become a fixture of most employee benefits packages; over time, however, plan features have been updated to meet the needs of a changing work force

In 1911, the Equitable Life Assurance Society of New York issued a "yearly renewable term employees' policy" to the Pantasote Leather Co. and its 121 employees. This group policy provided each member employee with life insurance coverage financed through group rate premiums paid by Pantasote Leather. At the time, the life insurance industry and the general public took little notice. Instead, both continued to rely on the individual policies that had been the lifeblood of the life insurance industry since its inception.(1)

Nevertheless, Equitable Life proceeded with its development of the new product, writing five other group policies over the next few months. In 1912, Montgomery Ward and Co. insured the lives of its 2,912 employees through the Equitable in the amount of 5,946,564.(2) The immense size of this single policy forced the remainder of the insurance industry and the U.S. business community to take notice. Group life insurance as a fringe benefit of employment began to take off.

The growth of employer-provided group life insurance has been tracked by the Bureau of Labor Statistics (BLS) and other analysts throughout this century. Recent data from the BLS Employee Benefits Survey indicate that nearly all full-time employees in the Nation's medium and large private establishments-those with 100 workers or more--are provided group life insurance that is at least partially financed by their employers. Additionally, close to two-thirds of full-time employees in small establishments receive life insurance coverage.(3) Typical features of today's plans include coverage for retirees and for dependents of active workers, and options for employees to choose added protection (though often at their own cost). The following discussion tracks the changes in group life insurance plans, and in the data reported about such plans, from the implementation of the Pantasote Leather Co. agreement through the present day.

The rationale for group plans

At their annual meeting in 1917, the National Convention of Insurance Commissioners attempted to distinguish between employer-provided group life insurance and the more traditional individual term life coverage. The commissioners defined the newer concept as:

  .. that form of life insurance covering not
    less than fifty employees with or without medical
    examination, written under a policy issued
    to the employer, the premium on which is to be
    paid by the employer or by the employer and
    employees jointly, and insuring only all of his
    employees, or all of any class or classes thereof
    determined by conditions pertaining to the
    employment, for amounts of insurance based
  upon some plan which will preclude individual
  selection, for the benefit of persons
  other than the employer.(4)

Along with the points enumerated in this definition, which remains relatively appropriate even to this day, there are two other important characteristics that distinguish group life insurance from the more traditional individual term life coverage. Most importantly, a group contract allows all of the participants covered by the policy to benefit from coverage while placing the burden of financing the plan either partly or entirely on the employer. In addition, group policies enable a larger population to participate in a plan at a lower cost than if each person had to purchase individual coverage. This is because group participation permits risk-sharing and reduces administrative expenses incurred by the insurance underwriter by spreading them over a greater number of policyholders.

In the late 1800's and early 1900's, establishments did not provide their employees with the variety of employee benefits programs that exists today. A small number of companies did offer specific forms of health and welfare insurance. These included accident and sickness insurance (to protect against short-term losses of income) and pensions. At the same time, many workers were purchasing, from commercial insurers and at their own expense, industrial insurance, which provided the dependents of a deceased worker with a small benefit (usually a lump sum of no more than $100 or $200) designed to pay the deceased employee's funeral expenses. Individual life insurance policies, which provided for the longer-term needs of the deceased's dependents, were also available through commercial insurance carriers. The vast majority of U. S. workers, however, did not have substantial amounts of life insurance.(5)

There were several factors that led to the creation of employer-sponsored group life insurance policies. In the increasingly industrialized environment of the later 1800's, families became more dependent on workers' wages as a major source of household income. With this dependence came the need to protect the family against a potential loss of wages. For some employees, these needs were met by mutual benefit associations.(6)