Lecture 8 Group Life Insurance Lifetime Coverage

1
Lecture 8Group Life InsuranceLifetime Coverage

• Group term insurance
• Current funding
• Retired-lives reserve
• Group universal life
• Group variable universal life
• Group term carve-outs

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Group Term InsuranceCurrent Funding

• Typical method of providing post-retirement
  coverage
• Reduction in coverage at retirement common
• Flat amount
• Percentage of pre-retirement coverage
• Generally noncontributory

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Group Term InsuranceRetired-Lives Reserve

• Popularity is tax driven
• Few new plans since Tax Reform Act of 1984
• Limited tax free coverage to 50,000
• Existing plans now mostly in unionized industries
• Fund established during working years to pay cost
  of post-retirement life insurance coverage
• Conditions
• Ordinary and necessary business expense
• Balance solely for post-retirement life insurance
• Annual contributions not greater than actuarial
  funding
• Employer cannot recapture any assets as long as
  anyone covered by plan is alive

4
Group Universal Life

• Combination of cash value life insurance with
  term insurance mortality costs
• Key factors
• Mortality charges
• Expense charges
• Interest rate
• Employee paid coverage
• Employee determines premiums (within limits)
• Any amount remaining after mortality costs and
  expenses goes into the cash value
• Death benefit usually a function of salary
• Often used as supplemental coverage
• Rates are not always competitive with individual
  policies

5
Group Variable Universal Life Insurance

• Similar to universal life but with cash value
  allocated to investment account chosen by
  employee
• Often 8 - 15 investment accounts available
• Stock funds
• Bond funds
• Balanced funds
• Employer stock
• Index funds

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Group Term Carve-Outs

• Reason for plans
• Prior to Tax Reform Act of 1984 there was no
  limit on tax free coverage for retirees
• After 1984, this coverage generated imputed
  income based on Uniform Premium Table 1 rates
• Carve-outs apply typically to shareholders and
  key executives
• General approach
• Limit coverage to 50,000 for certain employees
• Pay the premiums savings to employee in the
  form of a taxable bonus
• Use the bonus to buy permanent life insurance for
  the employee
• Effect of new Uniform Premium Table 1 rates