Life Insurance in a DB plan

[AndyH]

Are there standards or guidelines anywhere that determine the minimum adjustment to face amounts or the maximum "administrative delay" period before a new policy is issued for a new participant?

Example: Plan provides that life insurance is purchased equal to 100 X the anticipated death benefit. In year 2 the formula would call for a $10,000 increase in the death benefit. The agent says the minimum increase is $25,000. My impression was that an adjustment standard above $5,000 or so was not allowed, but I have yet to find this in print.

In year 2 a new participant enters 1/1 and insurance must be purchased. By when?

The plan document is silent on these matters other than that the insurance face amount must be 100 X.

Is there anything in print that addresses these issues?

[david rigby]

My experience with LI in a DB plan is very limited, but I'll give my 2 cents.

- Does the plan really say "life insurance will be purchased"? What if the EE is uninsurable?

- Shouldn't the plan define the benefit, and then permit the purchase of insurance?

- The plan should not care what the agent says, since that person may only represent one company, and that company is not mentioned in the plan (or is it?)

- The amount and timing of insurance purchase is part of the Administrator's responsibilities, so the PA needs some procedures to guide.

- If the plan language is ambiguous, or no help, I think you can amend it as needed, since this is a death benefit greater than the QPSA.

[AndyH]

Thanks for the comments pax.

First, this is (naturally) a takeover so it does say that insurance shall be purchased in the amount of 100 x and says little else about the details. Normally the administrative rules are spelled out.

I have seen a lot of insured plans over the years and if it is individually designed then it always says must purchase or it has no insurance at all. And if it is an adoption agreement there is usually a series of boxes to check.

But that does give me an idea-perhaps there is something useful I could extract if I can find a prototype that supports insured plans or through LRMs.

Re: the agent, I would like nothing more than to ignore or dismiss tha agent but that is not always politically possible. I need facts to support my claim that a minimum adjustment of $25,000 is inot permissable, as I believe to be the case. (The agent also says insurance is not to be purchased for anyone over age 60 but I can handle that one!)

And, yes, I agee, it should be amended to be more specific but I'd like to clarify the available parameters. There are plenty of insurance people out there who should know this. And i have seen language in insured plans that deals with non-insurability but I have never had a reason to focus on it.

Thanks again.

[Guest merlin]

Andy,

Just as a point of reference, back in the days of traditional insured plans funded with tradional whole life policies, the usual minimum incremental monthly benefit needed to trigger an additional policy purchase was $10. In other words, the minimum policy increment was $1000. Since a new policy was written for every increase, this kept the insurer from having to write a small policy every year for every participant. I dont rember any statutory or regulatory basis for it.

Even allowing for the evolution of insurance products into the myriad of flexible, variable, pretzel-like policies available today, a $25000 increment sounds way too high. That would require an increase in the projected retirement benefit of $250/month. Whose benefit goes up that much? The effect would be to keep most participants from ever getting any increases above their initial issue.

In addition to addressing the issue of an uninsurable participant, the plan should also address one who is insurable at non-standard rates, and what happens when a participant dies before insurance has been issued.

[AndyH]

Thanks for the comments Merlin. All good points.

Now the focus is on whether the insurance can be limited or phased out. It seems that the company has high turnover in early years of employment and a lot of the policies are being issued and then cancelled and the premiums are being wasted.

I'm interested in suggestions for phasing out or limiting life insurance. But, what is non-negotiable is that existing policies for HCEs must be maintained.

I suppose that no new policies could be issued provided that BRF testing is satisfied.

Could a 5 year waiting period be imposed for insurance coverage if BRF numberical testing was satisfied? Or would that somehow be a 410(a) issue?