Life insurance benefits for retired workers

Monthly Labor Review, Sept, 1990 by Margaret Simons, Cynthia Thompson

These eligibility requirements are modest in light of the difficulties retirees, and older people in general, may face in obtaining individual life insurance coverage. In the rare cases in which coverage is available to older individuals through private insurance, such policies ordinarily offer small amounts of insurance protection and are often Costly.(6) Financing Retiree benefits were financed entirely by the employer for 84 percent of life insurance participants in 1989. Ten percent of participants were in plans that required retirees to pay the cost of their life insurance protection, while the remaining 6 percent of the retirees participated in plans that were jointly financed by the employer and the employee. Patterns in financing the plans were similar in all three occupational groups examined. (See table 3.)

The continuation of life insurance coverage for retirees can be expensive, given the advancing ages of the insured. Employers, who generally pay the entire cost for retiree coverage, may look to a variety of arrangements for funding these benefits. Typically, employers finance retiree life insurance on a pay-as-you-go basis, paying increasing premiums as retirees age.

Alternatively, employers may prefund retiree life insurance by paying premiums to a deposit fund or a retired lives reserve account throughout the working life of an employee. These funds are then used to purchase retiree insurance. While such arrangements allow employers to spread premium payments over many years, their tax-related aspects are not always favorable. Because contributions are not made for benefits that are immediately available to employees, such contributions may not be deductible by employers. A deduction for prefunded retiree life insurance benefits may be allowed if the plan meets a number of restrictions on contribution amounts and eventual use of the funds.(7) Amounts of coverage For 9 percent of participants with retiree protection, the benefits after retirement were unchanged from those provided during the employee's years of active work. The remaining participants had their benefits reduced, either once to a flat dollar amount, once to a percent of prior coverage, or gradually over a period of time. (See table 4.) In nearly all cases, the retiree's life insurance coverage was reduced immediately upon retirement; in a few cases, the reduction began within a few months of retirement. White-collar retirees most commonly experienced gradual reductions in life insurance protection throughout their retirement years. In contrast, single reductions to a nat dollar amount were most common among blue-collar workers.

Among participants whose plans provided for flat dollar amounts of retiree coverage, white-collar participants, on average, received greater protection than did blue-collar participants. The most common flat amount for all workers was $5,000. Other common amounts were $2,000 and $3,000; few participants had coverage of over $10,000. (See table 5.)