Lecture 8Group Life Insurance

Lifetime Coverage• Group term insurance

– Current funding– Retired-lives reserve

• Group universal life

• Group variable universal life

• Group term carve-outs

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

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

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

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

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