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Life Insurance in DB Plan

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Guest flogger

I don't really want to participate in the name calling, but I will add some notes from my experience as both an actuary and a licensed insurance agent. I have never seen guaranteed issue or simplified issue (as a standard practice or a beste practice) on less than 10 lives. (certainly different from health insurance) Further, the fewer lives there are the smaller the guaranteed issue maximum face amount and I doubt that even if GI were allowed for 2 lives that there could be any substantial face amount with 2 lives.

I also have seen the death benefit provision allow for PVAB or the 100X MRB IF insurance has been underwritten. The operation of the plan must be nondiscriminatory, meaning that the "waiting period" for underwriting must applied uniformly. I've also seen cavaets that if the participant is uninsurable that an additional benefit in the form of a fixed annuity will be purchase with what would have been the standard premium for the insurance purchase.

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Without doing much looking here are a few, not that I would consider using these, but they were just easy to find:

Look at the note at the bottom regarding CA law and 2-9 eligible employees. Eligible employees does not mean the number that must be covered, you could cover just 1 of the eligibles. The amount is up to $200,000 but with just a few lives it might be capped at $75,000-$100,000. This not even with a regular life insureer geared to offer in this market:

http://www.bscalife.com/life.htm

In the middle you have:

http://www.cigna.com/group/brochures/life/UniversalLife.pdf

NYLife using Group UL without special circumstances has a standard product that needs 10 participants but has higher premium requirements:

http://www.newyorklife.com/cda/0,3254,10972,00.html

However, most of the above would not be used by most in relation to pension, NQDC Plans or SERPs. Something more like this Pru product would be used. Note the number of lives varies by state with NY being 15 lives for GI with full underwriting for less than 15 lives. However as with NYLife etc the underwriting can be and should be done in advance:

http://www.prudential.com/productsAndServi...y%253D0,00.html

In between these extremes, it is the agent's job to find what is available for the group in a particular area for the particular purpose whether using Term or Cash Value insurance. Underwriting delays and delays in policy issuing are not meaningful factors nor is binding the coverage.

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I will note that of the small DB plans with insurance (usually whole life) I've dealt with over the last 20 years, they have invariably held individual, not group, policies. Actually, none of them have had group policies (which would certainly make life easier if they were group, but the fact is that they get sold on an individual basis). Maybe just my experience...

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Even then underwriting delay has nothing to do with the insurers' liability to pay a deat claim, does it?

In individual plans, in particular, the coverage is bound with the application. Also the underwriting can be and should be done in advance of the application anyhow.

As a result the Plan is never "on the hook" at any time.

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Hey GBurns, I'm on your side. My perception of this thread is that a DB plan was set up contemplating the purchase of insurance, a valuation was run contemplating the purchase of insurance, but the plan sponsor never took the steps to actually purchase said insurance. So no underwriting, no claim back at the insurance company, since the sponsor never actually contacted said insurance company. That's what I feel happened here. Sponsor never went forward in any measure to obtain the insurance policies. What is the real story, AC, before we all end up at each others throats with peripheral arguments?

So no, I don't think that there are issues with respect to the insurance company here, since in all likelihood the insurance company never heard word one from the sponsor (although that would make a pretty entertaining case: well, the sponsor said he was going to buy insurance from you, but never did anything about it, so since you have deeper pockets, why don't you pay me the death benefit that you never knew about).

My suspicion is that someone ran a val for the sponsor contemplating buying these contracts, but they never went forward in any measure to get said contracts. I wouldn't rely on the original val since they clearly changed their mind about provding any insured death benefit. Although that might make an interesting way to get around a sponsor overcontributing during the year (well see, we assumed that they were going to buy some insurance so the maximum is actually higher than what we calculated).

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Since we seem to be back to civility, I would like to know what flogger and GBurns were getting at with the discussion of "simplified issue" or "guaranteed issue" and participant counts and various policy types. What were the points that were being made? I will admit I have no clue what the significance of these policy differences are and how they relate to AC's question. Care to explain?

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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.

It started with the 2 posts by SoCal responding to Kirk and mbozek inparticular the second one quoted above to which I responded. The issue was the "protect the plan".

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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 don't understand the first question, you are showing contributions on a Sch B, not premiums, per se, and of course you would never show estimated amounts.

To the second question, as indicated in the prior posts, I would definitely NOT revise the NC numbers.

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Hey Blink:

What I was getting at, especially with a new plan, is that the premiums paid to the insurance company would generally be paid directly by the plan sponsor and counted as a contribution (and hence shown on the Schedule B as deposits). Now if you were taking the approach that the entire cost would be paid by the trust, and then premium checks would be written out by the trust's checking account, the actual premium payments wouldn't show on the Schedule B, just the total deposit to the trust.

However, most new plans probably are operating (since they don't have concerns about overfunding off the get go) by having the sponsor directly pay the premium. Hence the actual amount would go on the Schedule B.

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Yeah it is, but...

Suppose you calculate costs as sidefund $100k, premiums of $20k.

Method 1 (payment of premium by sponsor directly)

Side Fund made on 1/2/2005

Premium paid on 1/20/2005

Schedule B shows two payments on respective dates.

Method 2 (all into trust, then written out of trust)

Total of $120k paid on 1/2/2005

Trust writes premium on 1/20/2005

Schedule B shows one payment on 1/2/2005.

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This case seems more that the plan sponsor contributed to the trust rather than making a direct premium payment to an insurer. Which should make the contribution deductible by the plan sponsor but leaves a question as to how the Trust accounts for it.

I think that is what the OP was really asking, Is it deductible and by whom?

**********************

This post should have been before mwyatt's response, but we were both posting at the same time.

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My original opinion was that the actuary doing the work should determine what assumptions are comfortable to them, and then the deduction is on the actuary's hands. If the original actuary was not there for the Schedule B, then their work just does not matter. Only the new actuary makes that determination.

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