Life Insurance in a DB Plan

[Madison71]

I have a question that came up on a defined benefit plan holds a life insurance policy. The participant is 90 years old. He has been advised by his financial advisor that it would be good to get that policy out of the plan before it "matures." I received this voicemail and was hoping someone could direct me to appropriate sections dealing with life insurance held in a DB plan as I have no experience with it. He will have to contact his attorney about this, but was hoping to somewhat intelligently answer some questions for him off the clock. I don't know anything about this plan other than what was provided in the voicemail.

[Andy the Actuary]

Of most concern, what is your interest in providing advice regarding a subject area and plan (and possibly a client) you know nothing about?

[david rigby]

Having the word "matures" in quotes raises the question of what is really (really) meant by the statement.

Many decades ago, an insured might get a check from an insurance company at age 100 (along with lots of publicity) because the insurance policy "matured". Very unlikely that any such event occurs anymore.

[Madison71]

Thanks for your time - I was hoping someone could provide a bit of direction in the area. He is not a client - one of his children is a client. I was hoping to provide at least a little direction since his son is a valued client.

[david rigby]

Just a hunch: when the financial advisor says "before it matures", she/he means "before you die".

I suggest looking at what happens in that event: where does the death benefit go / what is the definition of a death benefit in the Plan? If the answer(s) are not what the plan sponsor wants, then now is the time to change the plan.

[Belgarath]

You know, one of the things I love about these boards is the "human interest" aspect - where theory gets applied to real life situations. A 90 year old who is still working and participating in a plan is really neat. Hopefully he'll have sufficient assets when he reaches old age.

At any rate, I don't see how you could possibly tell him much without knowing the specific provisions of the plan.

A lot of policies "mature" at some specific age, so the advisor may actually be talking about maturity rather than death. I'm not sure what special advantage there is, if any, if such maturity occurs inside or outside the plan, but I'll leave that the financial advisor.

[SoCalActuary]

Having the word "matures" in quotes raises the question of what is really (really) meant by the statement.

Many decades ago, an insured might get a check from an insurance company at age 100 (along with lots of publicity) because the insurance policy "matured". Very unlikely that any such event occurs anymore.

When I worked in life insurance, we designed policies to pay the full value of the death benefit when the insured reached the end of the mortality table designed in the plan. Given this person's age, that might have been age 100 based on the 58 CSO table. Some policies were designed as endowment at 90, 95, etc. The same facts hold true in these policies. The insurer has raised the cash value of the policy in such cases to cover the full face amount of the policy.

But the policy maturing is not actually a pension issue. The insurer usually has a conversion option to allow the funds to stay at the insurer, paying whatever insulting and pitiful interest rate they must pay (like 3%) until the insured requests the funds. So the financial advisor may be trying to get the money moved into a current investment that pays a more competitive rate. On the other hand, this may have become an opportunity to earn a commission.

[Madison71]

I actually learned that the advisor is suggesting doing a trade of the life insurance policy to his foundation in exchange for cash. I'm still getting all the details. I guess he is concerned about passing away and the policy actually going to his estate. He indicated that the plan's actuary and advisor both agree it is the right thing to do, but I haven't talked to either yet.