How Do People Decide on Life Insurance and Long-Term Disability Insurance Coverage?

Abstract

The group benefits landscape is changing dramatically. The menu of available options has grown; employers are paying for fewer benefits; and the responsibility for selecting the benefit package has been increasingly left to the employee. However, unlike in the pension world, very little is known about how individuals select their benefits packages, if their selections are optimal for their situations, or what employers can do to encourage the optimal benefit package selection. In this changing benefit landscape, it is important to determine three things: (1) What are current employer practices and their resulting take-up and coverage patterns?; (2) Which practices influence employees’ selections?; and (3) What can employers do to make the employees’ selections closer to the employees’ optimal choices? This first analysis allows us to peer into the black box of employee decision-making and identify what behavioral finance concepts are at play in the group benefits arena. Using information from 24 in-depth telephone interviews, we gain important insight into how employees determine whether to buy supplemental life and supplemental long-term disability insurance, how they decide how much to buy, what they liked and understood from their employer’s presentation, and what features might make these insurance benefits more appealing to the individual.