Funding of plans with Insurance

[Gary]

If a plan provides an insured death benefit, is the funding such that the cash value build up is considered a plan asset, thus reducing the retirement benefit funding requirement, but where the total funding is greater due to the additional payment for the premiums? Any thoughts would be appreciated

[Guest Paul McDonald]

Funding of plans with insured death benefits generally is done under one of two methods. The first method, generally used with traditional whole life products with a guaranteed cash surrender value assuming all premiums are paid when due and policy dividends (if any) are used to reduce future premium payments, separates the funding of plan benefits into two parts. The funding method calculates the value of future benefits, subtracts the future guaranteed cash surrender values of the contracts and the actuary calculates the level cost for the balance of the benefits not guaranteed by cash surrender values. The actuarial cost is added to the premiums to come up with the total plan cost.

Under the second approach (a.k.a. the envelope method) used normally with non-traditional insurance products (like universal life, variable life, variable universal life, etc.) which normally do not provide for a "guaranteed" cash surrender value, the actuarial method develops a total plan cost factoring in a cost of insurance for the death benefit. Current cash surrender values are treated as current plan assets. From the cost method that calculated a total plan cost, the trustees pay premiums. In this instance, the premiums are not an additional plan cost.

Some plans are also fully-insured (a.k.a. 412(i) Plans where the total plan cost is equal to the required premiums necessary to guarantee the benefits with an insurance company generally using a combination of life insurance and fixed annuities.

Hope this helps!

[Gary]

Paul,Thank you for your response. Under the 1st method, using aggregate cost method, would it be PVFB-CV@ret.-plan assets funded over working life; recomputed each year? Under 2nd method if there is no pre ret mortality, is it simply funding for the ret benefit and carving out the premiums from the total cost? i.e. total pvfb or AL is the same as if there were no death benefit?

[Lorraine Dorsa]

Under the first method, the funding is recomputed each year.

Under the second method, the annual cost is the sum of the normal cost (computed using the plan's funding assumptions) and the 1 year term cost of insurance. Therefore, the annual cost is larger than the cost of a similar uninsured plan by the amount of the 1 year term cost. This total cost is then split between insurance premiums and a side fund contribution.