Insurance In a Frozen DB Plan

[Guest merlin]

An insured frozen defined benefit plan is funded using the Unit Credit method. Insurance is valued using the current cash values in the assets, and adding a term cost to the Normal Cost. Since no benefits are accruing the Normal Cost = -0-. Should the term cost also go to -0-?

[Effen]

Does the term cost = $0? Just because benefits are no longer accruing, doesn't mean the cost of the insurance is $0. You may still have a NC, even though the plan is frozen.

Think of it as an expense. If you have an explicit expense assumption, it doesn't go away just because the benefits were frozen.

[SoCalActuary]

The term cost applies to the risk of death, and the additional benefit paid at death is usually the excess of

the face amount in the policy minus the cash value of the policy.

You then multiply the amount at risk by a reasonable rate of mortality, possibly including some formula for expenses built into the policy.

If you have no death benefit, then you have no amount at risk, and no cost.

If you have assets allocated that exceed the death benefit to be provided, then you also have no amount

at risk. Otherwise, you should be computing a term cost, even if the policy has accumulated dividends in excess of expected cash values since there is still an amount at risk.