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Life Insurance in DB Plan

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In these plans I wonder what is conveyed to the employees in the enrollment material? Is the SPD wording comparable to that in the PD? In other words were the employees given the impression and did the employees have the interpretation that life insurance would (not may) be purchased? Did the employees feel and expect that their benefit was covered by life insurance?

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Initial communications to participants in many small plans are not what I call full & complete disclosure.

But with that tangential note aside, the SPD needs to describe that the death benefit includes insurance if issued. Thus a participant would have to be aware that the insurance policy was written before the death benefit goes into effect.

This is very important to protect the plan from unfunded and premature deaths before the policy can be issued. It also gives the employee more incentive to cooperate in the period while the policy is being underwritten.

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What is an "unfunded" death?

What does it matter if the death is "premature" which I presume to mean death before the policy is issued? The insurance company would still pay the death benefit barring something that would have prevented a policy being issued of which there are very few things.

What does it matter to the plan if death occurs after application but before issue of policy? Why would this situation be different from what happens if it was an individual purchasing the policy? Coverage is bound with the application sometimes even without the initial premium.

What would the employee be cooperating about? Waiting on the completion of underwriting is no different from waiting on the issuing of a medical card or 401(k) account number etc.

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Guest Donkey Kong

GBurns - good thing you're not in the mob or you would have been wacked for asking too many questions!

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Donkey Kong

Feel free not to answer any.

I would have been the one in charge of whackers, anyhow, especially for knee caps.

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GBurns - think of a small plan where the death benefit is 100 x projected benefit.

A new participant with a projected monthly benefit is $1,000 per month, justifying $100,000 of life insurance.

However, it takes time for a new life policy to make it thru the process of application, underwriting and approval. If death occurs before the policy is approved, where does the new pension plan get $100,000? The insurance company won't pay it because there is too much risk of issuing a "death-bed" policy when the underwriter hasn't approved it.

That is what is meant by unfunded death.

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That is not how insurance policies are issued.

Group insurance should be used for most plans and is available down to 2 lives. Almost all types are available as group insurance. Group insurance comes as guaranteed issue or simplified issue. Declineable conditions are stated on most applications. For guaranteed issue usually only terminal cases can be declined. Simplified issues has medical questions on the application the answers to which determines the level of underwriting. If there are conditions the case is rated. The agent knows in advance what is acceptable and should not submit a case that is already known as subject to decline. For rated cases, if the offer from the initial insurer is not acceptable there are many impaired risk insurers available.

Guaranteed issues can be issued and very often is issued in cases where an individual application would be rated or declined. If the group is large even terminal "death bed" cases have to be issued because in larger groups very little if anything can be declined.

Individual (non group) cases are medically underwritten but then again the agent should select companies that take a particular type of risk or just use an impaired risk insurer from the start.

Whether group or individual insurance, the coverage is bound with the application. The case is either issued as applied for, or rated. The agent should not have submitted a declineable case to such an insurer.

If the applicant dies before the policy is issued, there are very few options that the insurer has to decline paying. The few are material misrepresentation, fraud and undisclosed declineable medical condition. If the case would normally have been rated, the insurer would rate it but would still have to pay the death benefit.

The Plan gets the $100,000 from the insurance company.

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I appreciate your view of best practices. However, my experience is less efficient and sometimes less noble. I see cases where the insurance issues have not taken place timely, and thus I accept the position found in plan documents that show the death benefit based on the policies actually issued.

Just my luck to work with less than perfect insurance agents ;)

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What I gave was standard practice, best practices is still better. To get that I defer to those with more expertise.

If you have been seeing less than the standard "by the book" "as per the application" and the standard new business submission guidelines that I outlined, you have not been getting "less than perfect" you have been getting negligent and possibly incompetent service.

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I jumping in late with this long thread, but if the plan says the death benefit is 100X, then the death benefit is 100X, regardless if the plan insured it or not.

Now, if the plan says the death ben is "up to" 100X, but limited to the amount of insurance issued, doesn't that create a fairly significant discrimination in practice issue if the policy is not issued immediately? Seems ripe for a law suit if the HCE is all nicely insured, but the plan just didn't get the NHCE's policy issued before he died.

I know of lots of attorney's who would love this one.

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Effen: the plans I see have the type of language given by the first post.

The insured death benefit is only available if issued.

As to discrimination in practice, your example is right on. If I find the insurance is not issued uniformly while doing the actuarial review, including the type of contracts used, then I advise of probable discrimination, risk of disqualification, and the need to correct the situation.

Having said this, small plans rarely find attorneys who actually are willing to help participants who face discrimination in practice. ;) But that's another subject for a different thread.

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could be me maybe not

What purpose does the Board serve for you?

If you do not want to use the Boards to converse Why are you here any at all?

And Yes, however it should be "knowledgeable on", since I am far from being expert in my few areas of coverage. I think I am just getting to the "competent and experienced" level.

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Maybe we should get a little back on track here.

AC, your original post stated that this was a takeover DB plan. The 2003 contribution consisted of a sidefund contribution amount and a mortality (presumably the insurance premiums) charge.

To clarify:

Was this plan established in 2003? If so, do you mean that the original design and valuation contemplated the purchase of life insurance policies, but that NO policies ended up being purchased, but that your client just ran with the original valuation and paid the total of the side fund contribution and contemplated premiums to the trust?

If this is the case, and NO policies were ever purchased, I'd have a hard time staying with the original valuation results. I'd rerun the numbers. Presumably the revised normal costs would come out between your original side fund normal cost and the cost of insurance.

Who signed the 2003 Schedule B (or has this come due yet if not a calendar year plan?)

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Guest Hans Moleman

Mr. Burns,

Your modesty is truly genuine and touching. For what it's worth, I consider you an expert, well, either that or a maniacal doddling rambler one step short of senility. I haven't decided.

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Hans (Mr Moleman?)

Thank you for the kind words, but I have to warn you that as a result you might now have been classified by some as being questionable and subject to a whack.

I have heard that it is a very fine line between insanity and genius. I walk with a slight limp so that concerns me greatly so I just try not to wobble but I will doddle. Enough of my rambling before you really decide.

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The effective date of the plan was 1/1/03.

Mwyatt, here's an answer to 2 of your questions.

If this is the case, and NO policies were ever purchased, I'd have a hard time staying with the original valuation results.

As indicated in prior posts, I disagree with this statement, but I was curious to your reasoning. Do you feel the purchase of insurance is not an assumption?

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Having said this, small plans rarely find attorneys who actually are willing to help participants who face discrimination in practice.

Maybe I should forward this to John Grisham. Seems like the kind of sorted conspiracy that he could turn into another best seller. Good insurance guys, bad insurance guys, corrupt actuaries and attorneys, greedy plan administrators and the poor secretaries mother who just wants to bury her daughter...I'm getting all tingly just thinking about it :D

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Hey Blink:

Just wanted a clarification on the effective date (was buried in too many posts jumping over poor old GBurns :) ).

Let's look at it another way. Let's assume you did your original valuation contemplating the issuance of (obviously) new policies for all (let's not confuse this with the other problem of selective policies for only the HCEs being issued) and that you used the expectation of insurance policies through Gigantor Corp Life Insurance and your estimates of what the premiums would end up being, given proposed policies from the agent. However, the agent decides to go with Fred's Bait, Tackle, and Insurance company, so the actual premiums (and projected cash surrender values) differ from what you originally estimated. Would you show on the Schedule B the estimated or actual premiums paid? And would you possibly revise your normal cost numbers to reflect the revised CSV numbers? I know which way I would lean in this case.

Now you have a situation where your original proposal/valuation contemplated insurance but the plan sponsor for whatever reason didn't go ahead and issue any insurance policies. I would be curious to know whether the sponsor decided to bag the purchase of insurance entirely or whether they just didn't get their act together for 2003 issuance but went forward in 2004.

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In addition, you could use reasonable mortality tables for death benefit claims as used by insurance companies.

You could also anticipate some policy expense charges in the current year.

It seems reasonable that the expenses you would see in a UL policy ledger statement are plan expenses for providing the death benefit.

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SoCalActuary, as an actuary I'm just more familiar with "sorted" details than "sordid" ones. Funny typo... if you’re an actuary. :lol:

GBurns - I like your perspectives - don't let those school yard bullies kick you around. You don't need to apologize to anyone.

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