What is the difference between price vs affordability in group benefits?
For the purpose of this article let’s define price as the actual cost of a good or service, while affordability is what an individual or business feels is a comfortable amount to pay for that product or service. Price is a reality while affordability is subjective. We are going to talk about price vs affordability in group benefits.
For example, let’s say you are in the market for an electric car. If you are comfortable affording a Toyota Prius or a Nissan Leaf, it would not matter what kind of a (realistic) price you could get you on a Tesla Model S if you feel it is unaffordable.
How does price vs affordability apply to Group Benefits?
Most employers will express their desire for an affordable benefits plan by initially discussing price. Within just a few questions it becomes clear that what they are communicating is their need for a plan that meets a variety of needs including affordability.
Here are some of the most common affordability topics to consider:
- Is it important for the employer to be able to reasonably budget for the cost of their benefits going forward?
- What type of coverage would be competitive in their industry?
- Are they being a pre-profit company watching their burn rate?
- Are they a scaling company with a growing workforce?
- Is there an existing plan design that is no longer relevant?
- Did the employer unknowingly start their benefits plan with “acquisition pricing” followed by significant rate increases making the plan now unaffordable?
When an employer asks what the price of a plan will be, we end up discussing affordability.
As most employers do a 50/50 cost sharing of benefits with staff, the most important consideration for an employer when selecting a benefits plan is if the staff will feel the deduction for benefits from their paycheque is affordable. Example: staff making $12 – $15 per hour can afford and expect a very different type of benefits plan than people making journeyman rates or software engineers making $120,000+.
The guidelines we have developed over the years for plans that include Life Insurance, Extended Health, and Dental, based on a 50/50 split of premium, we find that if benefits premiums are within approx. 2.5 – 3% of payroll on the employer side, and 2.5 – 3% of payroll on the employee side, almost everybody’s happy. (If you add disability, that number would increase up to 3.25%)
It’s not an exact science, however we find it is an approach that works in almost every circumstance.
Is our current plan affordable?
If you have been questioning the affordability of your current benefits plan, try this; take your current monthly benefits premium and divide it by the monthly payroll of the staff on the plan. If the number is higher than the guidelines outlined above, you may need to consider resetting and starting fresh.
When making a decision about your benefits, it’s important to know all the facts in order to make a good and informed decision. We just published a blog discussing that exact topic. Click here to read the article.
ClearBenefits.ca is a Group Benefits Provider specializing in Pooled Benefits Programs. We develop, distribute, manage, and service pooled Group Benefits programs.
Each of our 3 Pooled Group Benefits programs features 5 options that can meet the needs of almost any small to medium size business with 3 – 50+ staff looking for affordable, traditional-style, or contemporary coverage.