When Dean Allison left his job as a property manager at AT&T in 1998, the company offered an incentive to retire: a payment of at least $63,000 upon his death.

He took the deal, figuring the money would someday help his wife cover funeral expenses, pay outstanding bills and have more to live on.

Early in 2021, AT&T told Mr. Allison it would...

When Dean Allison left his job as a property manager at AT&T in 1998, the company offered an incentive to retire: a payment of at least $63,000 upon his death.

He took the deal, figuring the money would someday help his wife cover funeral expenses, pay outstanding bills and have more to live on.

Early in 2021, AT&T told Mr. Allison it would pay no more than $15,000 if he dies after Dec. 31.

AT&T’s decision to cut life insurance and death benefits as of Jan. 1 for many of the 220,000 retirees eligible for the benefits has roiled a generation of workers who say their former employer is reneging on a promise.

The cuts don’t apply to top executives, who have life insurance under a separate company-paid program, which the company can’t reduce without their permission. AT&T will pay heirs of Randall Stephenson, who left as chief executive in 2020, $3.6 million under a life-insurance plan reviewed by the board last year, securities filings show.

AT&T said that the cuts for other retirees will bring their benefits more in line with benefits at other large employers, and that the change will increase payouts at death for more than 1,000 retirees. It said only a handful of Fortune 100 companies still offer most employees life insurance that continues after retirement.

“We are working hard to responsibly balance the needs of the business and our taking care of our current 200,000 employees and 500,000 retirees and their dependents,” said an AT&T spokesman, Fletcher Cook. “It is admittedly a balancing act—one that many companies have not successfully navigated.”

That’s little comfort to Mr. Allison, 75 years old, of Stuart, Fla. “If they had told me this 10 years ago, that they were going to cut this, I could have done some planning,” he said.

Today’s AT&T Inc. is the product of decades of splits and mergers, a remnant of the telephone monopoly nicknamed “Ma Bell” that shed its regional operations in 1984. Other offshoots of that breakup have treated retirees’ benefits differently.

AT&T retiree Monte Baggs said he expected his wife, Phillis, seated, to receive company-paid life insurance of at least $75,000 when he died, but AT&T has cut it to $15,000 if he dies after Dec. 31. ‘They’re trying to recover as much as they can, but they’re doing it on the backs of their retirees,’ he said.

Photo: Talia Herman for The Wall Street Journal

Verizon Communications Inc. hasn’t reduced already-retired workers’ life insurance or death benefits, though it has sold off business units to companies that later reduced them. Qwest Communications International Inc., now owned by Lumen Technologies Inc.,

eliminated retiree death benefits entirely, more than a decade ago. Both companies, like AT&T, have capped or reduced retirees’ health benefits as well.

In cutting existing retirees’ life-insurance benefits, AT&T joins a few other large companies that have done so in recent years. In 2019, 3M Co. roughly halved such benefits, and Howmet Aerospace Inc., a business carved out of Alcoa, eliminated life insurance for some retirees.

Unlike AT&T, both said their changes applied to executives, too. So did Corteva Inc., a seeds and chemicals company formed from DowDuPont that will end life insurance for about 50,000 retirees on Jan. 1. Vanguard Group recently backed off plans to eliminate retiree life insurance and other benefits after retirees protested.

When AT&T employees retired, the company told many of those who were managers that they had company-paid life insurance, which often equaled their final year’s pay, although the sum would decline by half once they hit age 70.

Some also were told that a “death benefit,” also based on final compensation, would be payable to a surviving spouse or dependent child. Nearly a third of management retirees affected by the latest cuts were eligible for both benefits.

Now, the life insurance benefit, no matter at what value it started, will be $15,000 if the management retiree dies after Dec. 31. The death benefit will be capped at $25,000.

Retired AT&T union members also often were told they had life insurance based on their pay. This benefit, too, was designed to decline by half after they reached 70. Now, if they die after Dec. 31, it will be just $25,000. Many union retirees are due a death benefit as well; it will be capped at $25,000 after Dec. 31.

John Tucciarone, who spent 42 years managing AT&T infrastructure in New York and New Jersey until his 2009 retirement, said he recalls executives defending wages that were slightly below competitors’ pay by citing the retirement benefits. “At the time, it was a from-cradle-to-grave type mentality,” said Mr. Tucciarone, a 74-year-old in Leland, N.C. “That stopped a lot of people looking at other places” for higher pay, he said.

In the mid-1990s, AT&T ceased telling most new employees that their spouse would get a death benefit. After 2007, it stopped providing managers a pledge of life insurance that continued in retirement. Over the years, it also stopped basing the life insurance given to new and current union workers on their pay, instead providing a flat $15,000.

AT&T informed retirees last winter of its plan to cut their benefits. Retirees protested to the board, and a group met with company benefits officials to urge them to reconsider.

AT&T said directors have received the complaints, together with executives’ response, and the company has no plans to change course.

“The marketplace that we operate in has changed. And it’s really forced us to try and still be competitive and make changes that are challenging,” said Julianne Galloway, AT&T’s vice president for global benefits, who met with the retirees.

Mr. Allison said that when he retired, AT&T promised a benefit of at least $63,000 upon his death, an amount the company has cut to $15,000 if he dies after Dec. 31.

Photo: Melody Timothee for The Wall Street Journal

Warren Miner, 84, retired in 1996 as one of AT&T’s benefits directors, after several years of helping shape health and life-insurance programs like those he hoped to enjoy in retirement.

Mr. Miner, of Estero, Fla., counted on being eligible for about $364,000 from the combination of life insurance and a separate death benefit.

Instead, after Dec. 31, his wife can expect at most $40,000 in total from the two programs.

“If there isn’t a legal obligation, there certainly is a moral obligation not to treat people this way,” Mr. Miner said.

AT&T’s Mr. Cook said the company’s “decision is very much about us fulfilling a moral obligation for more than 700,000 people, not just a select few.”

Federal law bars companies from cutting pension benefits for employees after they retire, but courts have said other kinds of retiree benefits—including healthcare, life insurance and a death benefit—can be changed if employers reserved a right to do so in official documentation.

Since the early 1990s, AT&T has included, in plan documents, language reserving a right to change retiree benefits at any time. For certain retirees whose plan documents predate this language, life insurance isn’t changing.

Many retirees said they knew it was possible for AT&T to change their benefits, but they never expected it to do so after maintaining them for decades.

Karla Billings joined AT&T in Topeka, Kan., in 1996 after being widowed at 32. She retired in 2017. She said she decided not to buy additional life insurance, figuring that AT&T’s $65,000 for retired union workers at her level was enough. Now, assuming she lives past Dec. 31, the payout will be $40,000 less.

“You’re at their mercy, and you don’t really have any recourse,” Ms. Billings said.

In letters announcing the reductions, AT&T said it often reviews its benefits to ensure it remains competitive and relevant to past and present employees.

“We continue to provide generous retirement benefits that many in corporate America don’t offer any more,” said Mr. Cook, the spokesman. He said four out of five employees, and nearly all retirees, are covered by the company’s pension plan, and the company provides subsidized healthcare for retirees. The wireless network operator also employs a large union-represented workforce under collective bargaining agreements that many competitors don’t have.

Life insurance that continues in retirement was once a hallmark of work at blue-chip companies. It was still available to about a third of U.S. workers at medium-size and large companies in 1997, when the Labor Department stopped tracking it. Benefits consulting firm Willis Towers Watson says about 13% of the 732 U.S. and foreign companies of various sizes that it tracks offer retiree life insurance. Few of today’s new corporate giants do.

Mr. Baggs, center, at an awards event when he was an AT&T manager.

Photo: Talia Herman for The Wall Street Journal

Companies aren’t required to set aside cash to pay future retiree benefits, as they have to do for pensions. But they must carry an obligation on their balance sheets reflecting the current value of every dollar they expect to pay in either pensions or retiree benefits in the future.

AT&T’s obligation for retiree healthcare and life insurance plans, which it combines in its disclosures, fell to about $14 billion at the end of 2020 from roughly double that amount five years earlier.

About a decade ago, AT&T had $12.75 billion dedicated to paying those benefits. This fund was down to $3.8 billion in December 2020, as payouts exceeded investment returns and company contributions, securities filings show.

Last year, AT&T booked a $2.7 billion accounting benefit from its retiree life and health plans. “A large portion” of this came from reducing its obligations for retiree life-insurance and death benefits, the company said, declining to be specific.

AT&T has told retirees they can buy new life-insurance policies at a discount through the company if they wish.

Scott Witt, an actuary and fee-only insurance adviser, said few 70- to 80-year-olds should seriously consider buying life insurance, even at a discount, because premiums rise rapidly at that age. Once it becomes prohibitively expensive, “they’ll drop the policy and then they’ll be worse off for having bought” it, he said.

An 80-year-old would need to pay $328 a month, or close to $4,000 a year, to maintain a life-insurance benefit of $50,000, according to a pricing schedule AT&T sent to employees in September.

“If I lived to be 90 years old, which I do expect, and paying an increasing premium, I would be far better off investing the money in equities,” said Monte Baggs, 80, who retired in late 1991 after 31 years with AT&T in California and Colorado.

At the time, Mr. Baggs said, he turned down a benefit that would have paid his widow a monthly pension after his death, figuring she would get life insurance of at least $75,000 when he died. Now, if he dies after Dec. 31, she will get $15,000.

“It’s obvious what they’re trying to do—they’re trying to recover as much as they can, but they’re doing it on the backs of their retirees,” Mr. Baggs said.

AT&T remains a profitable company, paying nearly $15 billion in annual shareholder dividends as of last year, although its stock has fallen by about 40% over five years. Investors soured on bets that AT&T made on entertainment companies DirecTV and Time Warner Inc. Under investor pressure, AT&T has been unwinding those bets. It sold a stake in DirecTV and set plans to hive off its WarnerMedia division through a merger with Discovery Inc.

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AT&T Chief Executive John Stankey, 59, is eligible for life insurance in retirement equal to his final salary; that is about $2.4 million today. The insurance amount will decline to half his final year’s salary at age 70 or once he has been retired for five years, whichever is later.

Mr. Stankey and his predecessor, Mr. Stephenson, have bought additional life-insurance coverage through AT&T, with the cost subsidized by the company, its filings show. AT&T has disclosed paying about $1.5 million for such coverage for Mr. Stankey and nearly $889,000 for Mr. Stephenson since 2015. The executives declined to comment through an AT&T spokesman.

AT&T said other companies also have paid for special life insurance for at least some executives.

Retiree benefits remain on AT&T’s financial radar. In a consulting agreement with a former AT&T finance chief, John Stephens, the company has offered to pay him an extra $500,000 if AT&T meets any of three financial targets. One is cutting $1 billion more from AT&T’s obligation for retiree pensions and benefits. Through an AT&T spokesman, Mr. Stephens declined to comment.

Write to Theo Francis at theo.francis@wsj.com and Drew FitzGerald at andrew.fitzgerald@wsj.com