Single Premium Paid Up Life insurance as a solution
Several months ago, a colleague and I worked on a case where the client, a smaller regional hospital, was acquired by a large health care system. Due to the acquisition, the hospital was about to lose life insurance coverage for its retired employees. Despite reaching out to various carriers throughout the life insurance market, none were willing to cover the retirees without also covering the hospital’s active employees. Fortunately, thanks to an alternative approach, a Single Premium Paid Up Life policy, we were able to offer our client a solution that kept their retired employees insured.
The concept behind this type of coverage is simple: the carrier collects the entire premium in a lump sum payment during the policy’s implementation, and then covers that liability until every single retiree dies. The carrier’s actuaries determine the total liability (the combined life insurance for all retirees), determines their retention (the cost to set up and administer the plan) and then applies an interest discount (based on interest rate levels and life expectancy of the retirees). In the example described above, the regional hospital was able to charge a one-time payment to policyholders that was 29% less than the total life insurance liability. Under this type of agreement, age, gender and market interest rates tend to be the main drivers of cost determination.
In addition, with a Single Premium Paid Up Life policy, the carrier handles all ongoing administration. This means that they house and manage all beneficiary forms and, since there is no ongoing billing, the customer has no administrative duties after implementation. The carrier produces customized certificates for each retiree and distributes them directly to the retirees, as well as regular communication updates about the plan.
While having to pay the entire premium at one time may seem daunting, the benefits of the plan tend to outweigh the challenges. This type of coverage often appeals to organizations (such as the acquiring health care system) since it allows them to hand off significant liability and the burden of policy administration for retirees that they would have otherwise have assumed. While every case is different, Single Premium Paid Up Life policies offer workable solutions for companies in transition whose retirees need continued life insurance coverage.
We encourage you to talk with your WGA team about how these types of policies can work for you.
About the Author
Kevin Murphy is a Vice President in William Gallagher Associates in the Employee Benefit Group. He manages, develops and maintains strong client, and consults with carriers on negotiable elements of underwriting to obtain the best plan designs at the most effective prices.