GBA 2

Limitations of term life insurance.

(1) Premiums increase exponentially with age (2) No savings value (3) Decreasing term poses many cons

Needs approach

Insures only the difference between the family's needs and its current assets. (1) Estate clearance fund (2) Income during readjustment (3) Income during dependency period (4) Life income for spouse (5) Special Needs (5) Retirement Needs

Income During the Readjustment Period

One or two years of the same income level.

Survivor income benefit insurance (SIBI)

Payable to only certain specified dependents and only in installments.

Extended Death Benefit

Pays death claim within one year of termination if the EE remained continuously disabled.

Maturity Value Benefit

Pays the lump sum or insatllmetns of the face value when the EE is permanently disabled.

Limited-payment whole life insurance.

Permenant lifetime coverage in which the premiums are paid for in a shorter period such as 10, 20, 25, 30 years on in a single premium or at age 65 or 70. VERY EXPENSIVE

Waiver of Premium Provision

Policy remains in force if: 1. EE is under a specific age (eg 60 or 65) 2. Disability occurs while covered 3. Disability is continuous till death 4. Proof of disability is provided at least once per year

Retiment Equity Act 1984 (REA)

Preretirement survivor benefits for active duty killed in service.

Ordinary life pros and cons

Pro: Savings value Con: Often too expensive to obtain adequate coverage

Coverage of older employees and retirees

Some ERs offer redudced amounts using various formulas. (1) immediate reduction of 50% (2) gradual reduction each year (3) or offer a lower flat amount

Original-Age Method

Term to cas-value conversion method that uses the orginating age, however, the difference must be paid with interest, and most have limited windows such as 5 years.

31-day continuation-of-protection provision

Terminated EEs get 31 days of protection to evaluate conversion option.

Cash Surrender Values

The amount paid to a policy holder that surrenders the policy = Legal Resv - (loading, first year aquisition cost)

Legal Reserve

The excess premiums paid during the early years of whole life coverage. Earn compound interest, and supplement the premium shortall in the final years of the policy

Life Income for Surviving Spouse

To account for the Blackout Period and Social Security supplementation

Variable universal life insurance

Usually purchases as investments or tax shelters. Similar to universal life exept the poilicy owner makes the investments, and the policy does not gaurantee a minimum interest rate or cash value unless the poilicy includes a fixed-income account which may gaurantee a minimum interest rate on the account value (there may be as many as 10 accounts available). High expense charges and substantial risk.

Benefit by Benefit Analysis allowed by ADEA

an ER may reduce the amount of coverage for an older worker if the acutarial cost is not less than the cost of providing more coverage to a youger worker. ER can reduce starting at age 65 by (1) 8 to 9% of the declining balance each year or (2) a one-time reduction of between 35 to 40%. ER may be able to reduce more based on its own demonstribly higher cost experience.

Reentry term

the insured is eligible for select rates if they periodically prove insurability by proving good health.

Estate Clearance Fund

"Clean up" fund for burial, medical bills, debts, estate admin expense, estate, inheritance, taxes

Pros for noncontributory life

1. All employees are insured 2. Tax advantages 3. Simplicity of administration 4. Economy of installation (no need to solicit) 5. Greater control of plan

Employee benefit plan considerations for group term life insurance. (5 items)

1. An entire group is insured w/o medical examination 2. Premiums often based on an experience rating (prospective or retrospective) 3. Economies of administration 4. A master contract 5. Plan lasts longer than any lifetime

Group term life provisions

1. Beneficiary Designation 2. Settlement Options 3. Assignment 4. Conversion provision 5. 31 day continuation of Protection 6. Continuation of Insurance 7. Waiver of Premium Provision 8. Accelerated Benefits

Disadvantages of group term

1. EE has no assurance the ER will continue the policy 2. Changing jobs. Policies are not portable 3. Provides protection only. NO savings 4. % of pay plans are lowest when they may be the most needed

Advantages of Group term life to ERs

1. EE morale and productivity may be enhanced 2. Coverage may be necessary for competitive reasons 3. Good for public and ER-EE relations

Conversion provision

1. EE must apply within 30 days of termination 2. No medical evidence of insurability 3. ER must inform EE of conversion rights within 15 days of being eligible 4. If master contract terminated, EEs can only convert up to $2000

Employee benefit-related death benefits

1. Group term 2. Goup paid-up 3. Group permanent 4. Group universal 5. Group survivor income 6. Group dependent life 7. Group AD&D 8. Group travel 9. Joint and survivor annuity benefits under retirement 10. Preretirement annuity benefits 11. Supplemental / optional life

Approaches for estimating the amount of life insurance to own.

1. Human life approach 2. Needs approach 3. Capital retention approach

Pros for contributory life

1. Larger benefits 2. Better use of employer's contributions (more ER dollars directed to those that want the benefit) 3. Employees may have more control 4. Greater employee interest

Characteristics of Term insurance

1. Limited periods 2. Renewable w/o evidence of insurability 3. Premiums increase each renewal b/c of age 4. Most convertivle to cash-value plans (1) Attanined Age Method or (2) Original-Age Method 5. Has no cash or savings value

Advantages of Group term life for the EE

1. Low cost protection 2. Reduces anxiety 3. Favorable tax status up to $50,000 Note: if plan discriminates in favor or key EEs, then the entire benefit for those key EEs is taxable 4. EE contributions automatically deducted from pay 5. Covertable w/o evidence of insurability 6. Those not insurable under an individual policy can get coverage

4 types of term insurance

1. Term ot age 65 policy 2. Decreasing term insurance 3. Reentry term insurance 4. Return of premium term insurance

A group term policy my be discriminitory unless

1. The plan benefits at least 70% of all EEs 2. At least 85% of those covered are not key EEs 3. is part of a cafeteria style plan 4. complies with a reasonable classification system found by the IRS to be nondiscriminatory. Note: part-time, seasonal, and workers with less than three years LOS do not have to be considered.

Variations of whole life insurance

1. Variable live insurance 2. Universal life insurance 3. Variable universal life insurance 4. Current assumtion whole life insurance 5. Indeterminate-premium whole life insurance

disability benefit provisions (3 types)

1. Waiver of Premium Provision 2. The maturity value benefit 3. Extended death benefit.

Decreasing term insurance

Amount of coverge declines each year buth the premium is constant. Coverage is fully paid a few years before it expires.

Term of age 65 policy

Coverage to age 65. Can be converted to a permenant plan before the age of 65

Continuation-of-insurance provision

ER can continue to provide term coverage for limited periods during temporary interuptions of active full-time employment.

Universal live insurance

Flexible premium determined by policyowner with either a level or increasing death benefit. Unbundles the protection and savings components. Premiums minus explicit and mortality charges are deposited into a cash value account and credited monthly interest. There is a minimum gauranteed interest with possible higher current rates. Very flexible and cash withdrawals or loans are permitted. Death benefit and earned interest is not taxable.

Income During the Dependency Period

Follows the Readjustment period and lasts until the youngest is 18. This amount is reduced if the surviving spouse is working.

Life Insurance note

Group poilicies are increasing while individual policies are decreasing.

Dependent group life insurance

May be part of the main policy or optional. (1) amounts over $2000 are taxable (2) usaully paid as a lump sum. (3) typically pays 50% of covereds coverage not to exceed $2000. High amounts may be offered through supplemental coverage.

22% of households have no life insurance

Median coverage is only $130,500

Special Needs

Mortgage Funds, Education Funds, Emergency Funds

Interactive calculators

Quality varies, assessed insurance needed varies.

Return of premium term

Refunds base premiums if the policy is kept in force. Typical periods are 15, 20, 25, or 30 years. Cons: (1) time-value of money (2) expensive (3) most cannot afford appropriate coverage levels

Active EEs after age 40

The Older Workers Benefit Protection Act amended the Age Discrimination in Employment Act of 1967 (ADEA) in 1990 restoring the "equal benefit or equal cost" requirement using either the (1) benefit by benefit analysis or (2) benefit package approach.

Accelerated death benefits

The payment of all or part of the death benefit if a patient can prove that he is terminally ill. The practice has become more common as third-parties have been purchasing the benefit rights covering those that are ill.

Human life value approach

The present value of the family's share of the deceased breawinner's future earnings. [Future earnings - (taxes, insurance, maint. costs)]*discount rate Pro: measures the economic value of an individual life Cons: (1) other sources of income are ingored (2) earnings and cost assumed to be constant (3) Family needs can quickly change (4) determining the right discount rate (5) inflation is ignored

Yearly renewable term insurance versus level premium method.

Yearly renewable are 1 year terms. Level premium method has 5, 10, 15, or 20 year terms.

Retirement Needs

additional supplemenation can be through cash-value life insurance, investments, annuity, or IRA

Ordinary whole life insurance

aka: continuous premium whole life or straight life -- is level premium policy that provides coverage to either age 100 or 121. It the insured survives, the face amount is paid

Variable Life Insurance

fixed-premium policy in which the benefit and cash value are dependent on the investment experience. The entire reserve is in an investment account. Cash surrender values are not gaurenteed. No minimum cash value.

Capital retention approach

insures a value to maintain income-producing capital assets rather than liquidating insurance proceeds (1) Prepare a Balance sheet (2) Determine current income capital (3) Determine additional income-capital needed.

Net amount at risk

is the difference between the legal reserve and face amount of insurance.

Benefit package approach allowed by ADEA

offers more flexibility than a benefit by benefit approach as long as the cost is no less than the package offered to younger groups, and the benefits are no less favorable in terms for older workers.

Black Out Period

refers to the period from the time that Social Security survivor benefits terminate to the time benefits are resumes. Benefits terminate when the youngest turns 16 and resumes when the spouse is 60.

Attained Age Method

term to cash-value conversion method bases premium on the insured's current age