The Perils of Employment-Linked Insurance

We are all too familiar with the economic fallout that has resulted from the coronavirus pandemic, both at the individual and national levels. An estimated one in five workers has collected unemployment benefits and GDP decreased at an annual rate of 32.9% in the second quarter.

These unemployment numbers have not only caused a loss of income for individuals and their families, they also represent a loss of insurance coverage commonly provided by employers. As people lose their jobs, they also lose access to important tools that were designed to help them weather such shocks.

Employees depend upon their employers for a number of insurance benefits. While health insurance is often the most notable, American workers heavily rely on life insurance and short- and long-term disability insurance offerings from their employers.

According to Kaiser Family Foundation, 49% of Americans receive their health benefits through work while, according to the American Council of Life Insurers, group insurance represented 43% of all life insurance policies in 2018.

The reliance on employment for insurance has always been a risk, but in the midst of a global pandemic that has spurred widespread economic uncertainty and high unemployment, many Americans have been left without these critical protections. Of those who have become unemployed due to the coronavirus crisis, 41% relied on their job for health insurance and 20% have not found alternative coverage.

Tying insurance access to employment is problematic for several reasons.

First, it makes insurance coverage unpredictable. Not only does coverage become questionable in the case of job loss, but employees are placed at the discretion of what their employers choose to offer.

Over the past decade, U.S. life insurance ownership has fallen 9 points to 54%, according to the 2020 Insurance Barometer Study.

Researchers attribute the drop in ownership to a broad decline in employer-paid group life insurance benefits. Even when it is offered, employer-provided life and disability insurance coverage usually offers insufficient coverage.

Employers often provide life insurance coverage equivalent to an employee’s annual salary. But the general rule of thumb says that coverage should equal 7 to 10 times one’s salary.

Likewise, group disability insurance usually doesn’t provide enough coverage for the average duration of a disability (two to three years), and many group plans only cover 60% of one’s income, according to PolicyGenius.

It is true that basic coverage for both life and disability is better than nothing and employees routinely have the opportunity to buy supplemental coverage, but people often think they’re adequately insured by what their employer provides when they’re actually not.

The most significant drawback of employer-provided insurance is that it overwhelmingly excludes low-wage workers.

Our research found that 33% of individuals receive free life insurance coverage in the workplace. But this rises to 44% for those with incomes over $100,000, and it drops to 21% for those with incomes less than $60,000.

Similarly, 59% of individuals receive free short-term disability coverage in the workplace. This rises to 62% for those with incomes over $100,000 and drops to 50% for those with incomes less than $60,000.

How can these barriers be overcome, especially in an entrenched system that has linked insurance coverage to one’s job for decades?

Insurtechs may have some answers. They are innovating in two specific ways that allow them to use different distribution models.

The first is automated underwriting where instead of relying on group coverage that bundles risk, vast consumer data and advanced predictive modeling allows insurers to rate customers as individuals. The second is digital sales distribution that go directly to consumers through AI-enabled chatbots instead of relying on employers or agents.

In the life insurance space, Bestow, Ladder, Ethos and Fabric are just a few examples of the many insurtechs innovating in this way.

Breeze and Simple Disability are innovating in the disability insurance space, with Breeze recently announcing an API-driven disability product with a digital application and underwriting process, and Simple Disability partnering with financial institutions as a distribution channel.

Challenging a decades-old insurance landscape is not easy but the pandemic has compounded its many weaknesses. By embracing innovation and breaking down our preconceived notions of insurance coverage, we can begin to build stronger social safety nets and increase access to the tools essential to building financial resilience.