The Truth About Voluntary Benefits

Whether it’s critical injury insurance, cancer insurance, or pet insurance…the hype surrounding voluntary benefits seems to increase every fall. Led by the calls of an animated duck, many employees hear the sales pitch for these products and become convinced that the extra premiums they pay will protect them financially from the risk of catastrophic accidents and illnesses. Employers, pinched between ever-rising health care costs and employee protests against higher deductibles, open the door for a voluntary sales pitch as an escape route. But employers who offer robust benefits packages aren’t doing their employees a favor by adding these kinds of voluntary benefits. These products, which typically pay out less than 50% of the premiums toward actual claims, may in the end hurt employers’ creditability once their employees realize that voluntary benefits aren’t much of a benefit after all.

Employees pay 100% of the premiums for voluntary benefits in return for a cash payout for an approved claim. Employers like voluntary benefits because they do not pay any of the cost, unlike with their other health and welfare benefits. Employees like voluntary benefits because they feel threatened by the high deductibles and out-of-pocket limits set by their health plan to control costs. Some voluntary benefits, such as disability or term life insurance, may make financial sense for employees if the potential loss is more than they can cover with their savings. The problem with many other voluntary products is that employees trade a reduction in their monthly take-home pay to protect against a very small risk of incurring a large claim. In many cases, employees are already protected against a large financial loss by their health plan, group disability plan, and other employer-provided benefits.

The few MCG clients who have voluntary products such as critical illness and accident insurance are seriously considering terminating them. These are mid-size employers who have health plans with moderately high deductibles and reasonable out-of-pocket limits, so no employee would go bankrupt on even the most serious of medical claims.

These employers also offer disability insurance to provide income in case of a long-term absence from work, and Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) for employees to save toward their health costs before taxes. Given this ample safety net, and the many limitations to voluntary critical illness and accident policies, most employees would be much better off saving their money in tax-advantaged or interest-bearing accounts. As shown in the graph below, this money can grow over time to cover the employee’s future health care costs.

Why Brokers Push Voluntary Benefits

Brokers are paid for their services through commissions based on a percentage of insurance sales. The Affordable Care Act has shined a light on broker commissions to help control health care costs. To maintain their income, brokers are marketing voluntary products more than ever before because the commissions on voluntary products are so high. Take a look at any of the articles targeted toward brokers, and you’ll find the phrases “increasing voluntary benefits sales” and “supplementing revenue from core benefits.”

Here’s a little-known secret: Voluntary benefits often provide the broker with a first-year commission exceeding 60%, compared to a 3-7% commission for health plans. 2 No wonder brokers are raving about voluntary products!

In response to the media buzz about voluntary products, our clients often ask us “Why doesn’t MCG encourage us to offer voluntary critical illness, cancer insurance, and other voluntary products?” The answer is quite simple. Unlike a broker, MCG isn’t paid by commissions, but rather on a fee-for-service basis. This enables us to provide unbiased advice, since we don’t have a stake in whether or not your employees elect certain benefits. Our job is to keep your employees happy and productive through effective benefits plan design and management. As we like to say, “Our mission is to help you achieve yours.”

The Difference Between Group and Individual Voluntary Benefits Products

Not all voluntary benefits are a bad deal. For example, life and disability benefits can be valuable because the financial consequences of a death or disability can be catastrophic. Voluntary dental and vision coverage can also make sense. While dental and vision claims are never catastrophic, this coverage is often a good value because insurers are able to negotiate network discounts with providers. But do critical illness, accident, and cancer voluntary benefits make sense? These voluntary benefits are intended to cover a portion of one’s deductible and coinsurance under certain circumstances. Ideally, employees are able to self-fund their out-of-pocket costs for such events through tax-advantaged HSAs or FSAs.

Voluntary critical illness and accident policies may have their place for low-income workers employed at small businesses that cannot afford to provide comprehensive health and disability insurance. In these limited cases, the employer can obtain group rates on voluntary products that will provide a better return for premiums paid. Offering voluntary benefits on a group basis also eliminates the strong sales pitch that often accompanies individual voluntary products. In either situation, the employer should educate its employees on the costs and benefits of electing such coverage, rather than simply inviting a commissioned insurance salesperson to sell products to its employees–often through a one-on-one, arm-twisting sales pitch that may be detrimental from an employee relations standpoint.

In sum, most mid-size employers offer “first class” benefits packages that already provide strong financial protection against serious illnesses and accidents. Be careful not to push “second class” voluntary benefits on your employees that may be in the best interests of your broker instead of your employees.

MCG is Here to Help

Marsh Consulting Group works closely with mid-size employers throughout the United States to customize health care cost control strategies, and then successfully communicate, manage, and measure them. Contact us at 805-239-9242 or email us at info@MCGteam.com to find out how we can help you.

1 Based on $600/year premium for a 40-year-old male non-smoker. www.bankrate.com/finance/insurance/do-you-need-critical-illness-insurance.aspx

2 Mertel, Wayne. Your Guide to Selling Voluntary Benefits. www.benefitspro.com/2012/04/30/your-guide-to-selling-voluntary-benefits.