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Life insurance as part of the retirement package

During the years of the last century following the Great Depression, many employers offered their employers welfare benefit and retirement plans, most recently regulated under the Employee Retirement Income Security Act of 1974. This was an example of a more compassionate approach with employers accepting that wage levels were low, often not providing enough opportunity to save for retirement. They therefore deducted a small percentage of pay during employment and invested it through a fund used to pay benefits. In some cases, the fund also bought life cover. The effect was to provide some security to the employees when reaching retirement age and providing enough to pay funeral and other expenses later on.

While the economy was doing well, most of the larger corporations and public employers were able to maintain a good flow of investment income into these funds. Indeed, so successful were many of these funds that employers took to borrowing money from the trustees rather than from their banks. In many cases, the trustees reported that this would leave a shortfall in the funds in the future. Employers were always quick to promise repayment should that shortfall become more likely.

Cultures change and, from the employees’ point of view, not always for the better. In the 1990s, the funds were hit by the dotcom bubble from 1995 onwards. Billions were wiped off the value of stockholdings and dividends were severely reduced. The shortfalls that were always in the distant future suddenly threatened to arrive the next day. Unfortunately, the employers did not have the cash to top up the funds. They therefore looked carefully at the wording of the plans to see precisely what their obligations were. Many discovered their attorneys had included a right to amend the plans without having to ask for consent from the trustees or employees.

Many of those who had retired were therefore surprised to receive notices telling them their benefits were being reduced. What had been quite generous benefit plans and insurance covers were significantly reduced. Some ex-employees sued, often with union backing. The most recent case involved the plans offered by Qwest Communications International. Retirees suddenly discovered their insurance cover had been reduced to $10,000 from minimums of $20,000 or $30,000 depending on when they retired. After a long series of first instance hearings and judgments, this finally hit the Court of Appeals, Tenth Circuit. Unfortunately, the court sided with the employers.

The moral of this story is simple. If you are a member of a plan provided by your employer, read it through. If you see a clause which says something like the following: "While the plans listed below are the plans currently provided to eligible employees upon retirement, the Company reserves the right to amend or terminate any or all provisions in the future for any reason." be warned. This means what it says. The employers can change the amount of payable whether during your life or as life insurance benefits. So no matter what your employer may have said in any literature about the plan — Qwest produced a video saying they would only ever vary the life insurance cover to improve it — you can find the benefits reduced tomorrow without you having a remedy. If this worries you, buy separate cover.

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