A new trend is gaining traction in the employer benefits space, and that’s Group Life Insurance Audits. Now don’t be misled. If you Google, ‘Life Insurance Audit,’ you’ll find page after page of results from carriers and brokers offering an evaluation for appropriate individual life coverage. That’s not it.
What’s gaining traction is the enlistment of outside firms to audit the entire group life membership, specifically the employees who elected higher levels of coverage with an Evidence of Insurability (EOI) requirement.
Over 180 Million Americans have some form of life insurance, and a staggering 80 Million-plus (44%) of those policies come through employers group life plans. Most companies allow their employees to ‘buy up’ from their guaranteed life insurance coverage, and employees pay for the increased life insurance coverage through an increased payroll deduction.
Employees frequently opt for a higher level of coverage during their web-based open enrollment. However, the challenge for some employers, especially large organizations, is that payroll deductions begin at the start of the plan year whether the employee completes the EOI or not.
This practice results in a gap of what the employee believes the coverage is and what the insurance carrier is obligated to pay in the event of a life insurance claim.
Back in Summer of 2016, a sizeable Midwestern healthcare organization had an employed hospital nurse unexpectedly die. Her grieving family received the benefits owed to them however it was over $150,000 less than they expected because the employee never completed the Evidence of Insurability with the carrier. That didn’t stop the payroll deductions though. In fact, the employee’s payroll deductions for the extended coverage was in place for every pay period since the start of the plan year (and for several years prior).
In the act of goodwill, and to avoid embarrassment, the health system wrote a check directly to the family to cover the life insurance gap. In response, the health system immediately launched a comprehensive third-party independent audit to identify discrepancies at the member level between coverage approved by the carrier and coverage being payroll deducted for the employees.
To their shock, nearly 12% of employees with extended life insurance coverage (and over 25% of spouses) never completed the required EOI. This discrepancy represented over $50 Million in total risk. As a result, they fired two employees and reprimanded two more.
Admittedly, this type of verification project may not be necessary for every employer out there, but for those that might be at risk, planning cannot begin soon enough.
In our next article, we’ll begin discussing best practices for conducting a group life insurance audit. In the meantime, you should check out our Group Life Insurance Audits page for more details.