Sunday, May 29, 2016

Private unemployment insurance

People buy all types of insurance -- health, auto, home -- as a mechanism to manage risk.  One of the biggest risks is losing one's job, an event likely to lead to months of zero earnings followed by a new job that pays much less than the one you had.  

Each state has an unemployment insurance system funded by payroll taxes.  The benefits are modest, usually about 25-33% of wages.  Their duration varies by state and with economic conditions; the unemployed typically can get benefits for a year or more during recessions whereas the cap can be three to six months in peak economic conditions.  Relying on state unemployment benefits when jobless is comparable to relying on Social Security when retired -- you better have other sources of income or have some savings you can draw down.

NYT reports that the private sector has come up with a new alternative -- an insurance product called IncomeAssure.  Employees pay a monthly premium and receive insurance that covers the gap between state unemployment insurance and 50% of their before-tax earnings.  As you might expect, the top benefit is capped at $125k.  Also there is a six month lag between the time you pay the premium and the time you are eligible to collect benefits.

To be successful, IncomeAssure will have to make wise decisions on pricing.  Premiums vary by location and occupation to reflect differential risks of being laid off; construction workers pay more for the same benefit than public school teachers.   IncomeAssure also will have to worry about having enough funds to pay promised benefits when the next recession hits.  And their customers should worry about this too!

Historically I have used unemployment insurance as an example of a product that the private market was unlikely to provide.  Maybe IncomeAssure will prove me wrong.

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