Who are benefits for, anyway?

With many Americans living paycheck-to-paycheck, U.S. employees have a significant need for financial protection products to secure their income and guard against unplanned medical expenses. However, employees frequently decline these benefits when they are offered at the workplace. Only two-thirds of employees purchase life insurance coverage at work when given the option, while roughly half enroll in disability coverage and less than one-third select critical illness insurance coverage. Why do so many employees choose not to enroll in benefits?

Is this right for me?

Some employees may opt out of nonmedical benefits because they do not believe these offerings are intended for people like them. In a recent report, “Don’t Look Down: Employees’ Understanding of Benefits and Risk,” LIMRA asked employees whether they thought life, disability, and critical illness products were “right for someone like me.”

While a majority of employees feels that life insurance coverage is appropriate for someone like them, they are on the fence about other coverages. Fewer than half believe they need disability insurance and only 36 percent feel they need a critical illness policy.

It is also noteworthy that a large portion of employees respond neutrally or only slightly agree or disagree with these sentiments, which suggests a lot of uncertainty. Given employees’ poor understanding of these benefits, many simply do not know if the coverage is intended for them.

Role of behavioral economics

Behavioral economics reveals that human behavior is highly influenced by social norms, particularly among groups that people perceive to be similar to themselves. In light of this, LIMRA asked employees if they think most people like them own certain insurance products. Their responses indicate that employees feel very little social pressure to enroll in these benefits.

Only 22 percent of employees think most people like them are covered by critical illness insurance, while 47 percent disagree. Similarly, 38 percent disagree that most people like them have disability coverage (versus only 34 percent who agree). Life insurance is the only product where a majority of employees (60 percent) think most others like them have the coverage.

Employees who believe others like them purchase benefits will tend to be influenced by this peer behavior. This could lead them to take a closer look at the information provided about these benefits and possibly enroll.

However, for the larger group of employees who think others like them do not have coverage, social pressure will discourage them from enrolling. These employees will perceive not having coverage to be the “norm” and assume it is safe to opt out, without giving these benefits proper consideration.

Who should purchase benefits?

If employees do not think insurance benefits are right for them, who do they believe these products are intended for?

Of employees who are offered disability insurance at work, only 38 percent recognize that anyone with a job who relies on their income should purchase this coverage. Troublingly, more than 1 in 5 think disability insurance is only for people with specific risk factors, such as having a physical or dangerous job, a family history of cancer, or a current disability.

Similarly, less than half of employees recognize that critical illness insurance is right for anyone. One in five think this coverage is only for people with a family history of cancer or other serious illness, while 15 percent believe the coverage is for people who have personally been diagnosed with a serious health condition.

Employees have a better understanding of life insurance. Eighty percent of employees recognize that life insurance is appropriate for anyone who wants to leave money to their spouse or dependents upon their death. However, some employees still express uncertainly about this or believe life insurance is only for high-risk individuals.

Confusion about who should purchase insurance benefits is contributing to low employee participation in these offerings. To counteract this trend, educating employees to understand how these products apply to their own lives is crucial. By clearly explaining what the products do and providing examples of how anyone could use them, benefit providers can help employees see the relevance of these offerings and help them make more informed financial decisions.

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Kimberly Landry conducts quantitative and qualitative research on the employee benefits industry, with a specific focus on employer and employee perspectives. She is also responsible for LIMRA’s worksite and supplemental health research programs. Landry joined LIMRA in 2008. She received her bachelor’s degree from Wesleyan University and her master’s degree from the University of Hartford.