Split Funding Method

[flosfur]

1) To be used with the split funding method, what requirements must a life insurance policy meet?

2) Policy illustrations generally show guaranteed and non-guaranteed projected values at the end of each policy year. Is there a requirement to use one or the other projected values or can one use either?

Here is the situation I am dealing with:

A "participating" life insurance policy has the following features:

a) To avoid the policy becoming a MEC (Modified Endowment Contract), no premium payments will be permitted from year 8. So basically it is a high cash value 7-premium insurance policy.

b) The policy has 4-tier expense load: Tier 1 for year 1 thru 5, Tier 2 for year 6-10 and so on. Tier 2 is substantially higher than Tier 1 (ranging from 2 times Tier 1 to 5 or 6 times Tier 1), Tier 3 is lower than Tier 2 but higher than Tier 1 and Tier 4 is lower than Tier 3 but is still higher than Tier 1.

The guaranteed values are projected using the 4-tier expense load and as a result the projected guaranteed values go down from year 6 thru 10 and then start going up again slowly.

c) In reality, the insurance company stops applying the expense load after year 5.

d) Non-guaranteed values are projected assuming zero expense load after year 5 and yearly policy bonuses of x%.

The projected non-guaranteed values are much higher than the guaranteed values even after year 7 (when the premium payments stop) and continue to remain substantially higher in later years.

For someone with more than 7 years to NRA, can this policy be used for split funding method ? And if yes, which projected values should one use for split funding – guaranteed or non-guaranteed? .

My understanding was that for split funding, the policy premiums must continue to at least the NRA of the participant. Otherwise, what is to stop someone using split funding in conjunction with a single premium policy – and in an extreme case completely fund the plan in a single plan year?

[Ron Snyder]

I haven't been on for several days, but noticed that no one had replied to your queries.

Q1) To be used with the split funding method, what requirements must a life insurance policy meet?

A1) The decision of how to take insurance policies into account for a split-funded valuation belongs to your actuary. The life insurance must have a cash value at retirement in order to utilize this method.

Q2) Policy illustrations generally show guaranteed and non-guaranteed projected values at the end of each policy year. Is there a requirement to use one or the other projected values or can one use either?

A2) No requirement. If I am the actuary using this method, I would run a policy illustration using the 412 pre-retirement interest rate for projection and use that projected value.

Q3) To avoid the policy becoming a MEC (Modified Endowment Contract), no premium payments will be permitted from year 8. So basically it is a high cash value 7-premium insurance policy.

A3) A split-funded valuation assumes that premiums are paid each year until the participant's NRA. Rather than maximum funding the policy illustration, you will need to solve for level premium to be paid over all remaining years of service.

The decision to overfund a policy using a single-premium dump or maximum funding for 7 years, is an investment decision of the trustee. Such decision will impact the actuarial valuation differently using a split funded valuation than it will a OYT calculation. If you are bent on using the policy in the manner you describe, I would not use a split funded valuation if I were your actuary. It seems inappropriate because you will be mixing assets from both the insurance and the investment funds together.

[SoCalActuary]

Flosfur is the actuary. I think he was looking for ideas from others, which vebaguru gave.

F - do you have access to the policy illustration software to make those projections?

If not, then I recommend you just go with envelope funding.