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ALU 202 > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

What is multilife underwiriting?

A

underwriting of groups of life insurance applicants primarily susing nontraditional approaches to risk selection

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2
Q

What is considered “nontraditional approaches” when u/w multilife

A
  1. Guaranteed issue (GI)- which does not include any traditional individual u/w
  2. Simplified issue (SI) which includes some nominal amount of individual u/w
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3
Q

What products are included in multilife u/w

A

UL, Variable life, private placement products that can involve (COLI) and bank-owned life insurance (BOLI) or variations thereof.

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4
Q

What is COLI?

A

characterized primaril.y by plans intended to provide benefits to meet the needs of executives.

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5
Q

What is BOLI?

A

a cost efficient and effective means for banks to offset rising employe benefit costs.

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6
Q

COLI accounts for the greatest dollar volume of in forfce multilife business what does BOLI account for?

A

accounts for growing share of the new business written.

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7
Q

What are CHOLIS?

A

Charity owned life insurance (CHOLI) known as foundation owned life insurance (FOLI). They are plans designed to insure multilife or large numbers of lives on behalf of a charity or foundation. The oft stated purpose of CHOLI is to provide an assured stream of ongoing revenue to the charity from the LI proceeds.

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8
Q

What is the primary focus of all multilife underwriting?

A

Anti-selection.
- minimized through the use of traditional u/w techniques.
-

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9
Q

What are Voluntary vs Nonvoluntary Plan designs?

A

Nonvoluntary plan designs plan participation is compulsory and the amount of LI to be placed on each life is fixed.
Voluntary plans are not as protected form anti-selection. People can choose to participate and amount of coverage is open to choice, therefore evidencfe is usually required.

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10
Q

What do you call voluntary plans that have limited underwriting?

A

SI programs.

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11
Q

Define the benefits of a plan described as “executive” which is determined by whether or not the eligible employe qualifies.

A
  1. company management is provided with g/l to ensure that all current and future eligible employees are properly enrolled
  2. plan administrator is provided with g/l as to who to enroll in the program
  3. insurance companyh can be confident that the employer remains consisten with the agreed upon eligibility requirement.
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12
Q

Why is eligibility requirements an important criteria?

A

This aids in establishing the expected overall mortality of a multi-life plan, and as such helps the plan to avoid becoming unprofitable due to excessive and unexpected claims.

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13
Q

What are some reasons for potentially adxverse mortality when designing a plan for multilife u/w?

A
  1. greater amount of coverage generally tends to be on the older lives simply because, on average they have acquired the higher position and higher sales due to longer employement.
  2. number of very highly compensated company executives is typically made up of a very small group of lives. Small Groups do not allow for the same spread of risk as large groups, sincef a single claim will have a much higher impact on an oerall group mortality if the group is small.
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14
Q

Spread of risk relates to what?

A

how much insurance is permitted on any one life relative to the size of the group and how much is permitted on any one life relative to the average death benefit for the group.

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15
Q

True or False:
Insurers must factor in the spread of risk when pricing a multilife plan and deciding weather to allow guaranteed or simplified issue.

A

True

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16
Q

What is an aggregated-funded plan design?

A

the emplyee can allot any amount of insurance amount of salary he or she wishes within the constraints of the employer’s plan.

  • no correlation between the individuals financial contribution and the amount of life insurance purchased on his or her life.
  • all monies are pooled together (aggregated) and spread equally over the likves being insured.
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17
Q

Who designs the premiums for an aggregated-funded plan design?

A

the plan administrator, either by equal life coverage on each or by spreading the pooled deferrals as equal premium.

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18
Q

Does the employee have ownership rights in the aggregated-funded plans?

A

No,

therefore there is no prospect of individual selection.

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19
Q

What are Tiered plan desgins?

A

plans where amounts of insurance vary by title or salary groupings.

  • comprised of several differing levels employee classes.
  • they have flat amount of coverage that increases in steps, based on set criteria usually salary or titles.
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20
Q

What makes tired plans less favourable than plansbased on a multiple of salary?

A

the large percentage jump in death benefit as one moves from one title to the next or one salary band to the next.

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21
Q

what type of plans are more favourable froma risk selection perspective?

A

plans utalized for deferred compensation that are aggregate-funded
- the motivation for these plans are entirely secondary to the goals of both the participating employee and the emplyer

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22
Q

What are the least favourable designs from an u/w perspective?

A

employer paid but individually owned plans, such as a 162 executive bonus plans.
- why? the individual can decide whether or not to keep the coverage when they retire or are terminated.

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23
Q

What is the differences between the COLI and BOLI businesses and the CHOLI and FOLI businesses.

A
  1. one key difference is the lack of employer/employee relationship. - voluntary plan on the part of participants and thus increases the potential adverse selection
  2. assuming lives to be insured are individuals who are donors to the charity or foundation, (older over younger)
  3. no assurance these individuals can be classified as actively at work.
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24
Q

What are the different types of methods of underwritiung one may see with multilife insurance.

A
  1. full u/w
  2. bundle u/w
  3. simplified issue
  4. guarenteed issue
  5. some combination.
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25
Q

What are the hurdles and risks of full underwriting multilife insurance?

A
  1. size of the group- Full u/w can compromise plan objectives, and some individuals could be dec
  2. Any adverse decision could result in loss of comission
  3. costly
  • Least commonly used.
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26
Q

What is bundle underwriting?

A

full underwriting where one or more substandard risk are accepted std, in the idea that others are preferred and SET
- not a perfectg solution
2. costly still
3.

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27
Q

What is simplified Issue?

A

SI always entails an abbreviated form of u/w with less evidence.
- contains an abbreviated app , and u/w can accept or reject coverage or get more information.

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28
Q

What is guaranteed issue

A
  1. most desirable method of underwriting for the producer
  2. usually has a condition in which the participant needs to be actively at work. and a provition which states employyes must not be ill 3 months before enrolling.
  3. lease expensive and most efficient
  4. utilizes an abbreviated application,
  5. uses an employee consent form
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29
Q

In corporation owned guaranteed issue multilife policies what is a consent form?

A
  1. the representative of the corporation completes a msater application and the individual lives complete a consent form. The purpose is
  2. provide acknowledgement by each participant that he/she consents to be insurerd with the understanding that the employer will own the policy and receive the proceeds.
  3. Material representation regarding actively at work or SM hx can be contested.
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30
Q

What factors keep the cost down for GI issued applications

A
  1. must include active workers, which exclused elderly risk
  2. most employee groups tend to be STD assessment overall
  3. the u/w contributes to relatively favourable mortality by making sure that
    a) the plan design is non-selective as to the coverage and paticipant
    b) the group does not present any untoward risk inheent in their business
    c) the spread of risk within the plan is acceptable
31
Q

How would one combine SI/FI/full underwritting?

A
  1. where employees get GI u/w but CEOS are s/t to full u/w.

2. employees set a base and employees can op to have more s/t u/w.

32
Q

What are common Nonqualified Executive compensation plans

A
  1. deferred compensation plan
  2. supplemental executive retirement plans (SERPs)
  3. section 162 bonus plans
  4. equity repurchase plans
33
Q

What are other type of plans not exclusive to executives?

A
  1. employee stock ownership plans (ESOPs)
  2. repurchase plans
  3. qualified pension plans.
34
Q

What are Deferred compensation plans?

A
  1. easily underwriten
  2. permit largest amount of GI coverage on fewer lives.
  3. goal is to minimize taxation and to maximize the ulitmate return on money deferred.
  4. there is no direct corelation between the amount of insurance place on a life and the amount the individual chooses to defer. The deferrals are aggregated and spread qually either by equal premiums, death benefits, or lives being insured.
35
Q

What is a Supplemental Executive Retirement Plan (SERPs)

A
  1. second most favourable
  2. motivated by the desire to maximize ones income in retirement while minimizing taxation.
  3. interrestin in the cash alu eo fthis policy, which will help funds the executives retirement
  4. employer is typically both the owner and payor of the insurance policy
  5. plans are aggregated funded, most SERP policies do have a direct relationship betwen the amount of money being set aside annually on seach insured life and the resulting death beneit.
  6. may not have favourable GI multiple as would be used in an aggregated-funded deferred compensation plan.
36
Q

What is a Section 162 Bonus plan?

A
  1. considered a bonus for compensation purpose
  2. referes to secion fo the US internal Revenue service tax code from which the most favourable tax tx for such plans is dervie.
  3. u/w favourable because it is a corporate paid benefit made available to all employees of a certain class, title or pay-grade. with no selectivity on the part of the employee as to participation.
  4. the amount of coverage provided is establoished on nonselective biases.
37
Q

What are some less favourable factors about a Section 162 bonus plan?

A
  1. how much death benefit should be permitted via GI?
  2. plans result in the LI policy being owned individually by each life insurerd and not by the corporation. > anti-selection
  3. when employee leaves the have the option to continue paying or let policy lapse. unhealthy people will keep it going-.> anti-selection ++
38
Q

What is an equity repurchase plan?

A
  1. company will have a future obligation to repurchased executives’ ownership stakes in a company.
39
Q

whats one way to make funds available to redeem shares an equity repurchase plan?

A

purchasing LI on the lives of the employees in an amount commensurate with thier shares

40
Q

What are some complications that arise with u/w an equity rrepurchase plans?

A
  1. there can be selectivity with respect to how one acquires shares in the compnay
  2. there can be some employees who have accquired relatively large equity positions due to their longetivity of employement, who whots title and compensation have not kept pace with their equity position
41
Q

How is multilife u/w used in a qualified pension plans?

A

due to nondiscrimination requirements, these plans can be required to cover all employees.
GI is the desired form of u/w.

42
Q

There are generally two different categories of qualified pension plans. What are they?

A
  1. defined benefit plans

2. defined contribution plans.

43
Q

what is a common form of a defined contribution plan?>

A

ESOP

- here, employees whos longetivity of employement results in their equity position posing a fincnial u/w challange.

44
Q

What are examples of executive based plans in which the objective is to maximize cash value?

A

Universal life plans
variable life
whole life product
- products that are used in individual life sales,

45
Q

What are private placement products

A

nonregistered products that are designed to be attactive investments vehicles that still enjoy the tax advantages of more traditional forms of life insruance.

  • made available to qualified pruchasers whom meet financial standards.
  • aggregated-funded plans typically use private placement products.
46
Q

Who is selling the product for multi-life plans and to whom?

A

the producer is selling to the employer.

- Once the employer accepts the plan design the challenge is then to find the participants to enroll in the plan.

47
Q

How can certain producers handle the hurdles that arrise when dealing with employees enrolling into the plan?

A
  1. be part of a worksite marketing organization
  2. chose to partner with a 3rd-party admin istrator (TPA) who has expertise at enrollment as well as the staff for ongoing plan administration.
48
Q

Business underwrtten on a GI basis, if corporate owned, will rely on what form?

A

consent form.

these attest to the employees understanding that they are being insurers willingly and have nol ownership rights.

49
Q

There is ongoing administration to life plans that are labor intensive, such as enrolling new employers, or updating employee positions etcs… what can be done to help in these situations

A

these ongoing administrations can require the service of a TPA, a producer’s sizable back-office staff and significant home office resources from the insurer.

50
Q

What are some external forces that can have significant impact on the multi-life plan marketplace?

A
  1. insurers financial ratings
  2. interrest rates
  3. regulatory environment
51
Q

Why would a insurance financial ratings matter?

A

small employers- selection of a carrier can be based more on the producer’s preferrence or other factors, for large employees, would expect the insurer meet some level of acceptability.

52
Q

Why would interrest rates matter?

A

the insurer has some control over the ratings, but cannot control interrest rates.

  • affects sales that are driven by cash accumulation rather than death benefit - focus on internal rate of return.
  • insurers have to constantly evaluate the interest rate enivronement to decide what heir crediting rate will be for some future period time time
53
Q

How does the regulatory environment affect marketing?

A
  1. unpredictable and greatest chanllange.

ie with government law/taxs changes

54
Q

What are some examples of pieces of US legislation over the years that have had substantial impact on the market?

A
  1. Employee Retirement Income security Act of 1974
  2. Tax equity and fiscal Responsibility act of 1982
  3. Deficit reduction Act of 1984
  4. Technical and miscellaneous Revenue Act of 1988
  5. Pension Protection Act of 2006.
55
Q

What are the criterias that define a highly compensated employee? (1 in 5)

A
  1. a 5% or more shareholder position at any time during the proceeding year
  2. an earned compensation of 95K, in the preceeding year
  3. one of 5 highest paid officers
  4. amount the highest paid 35% of all employees.
56
Q

Define concentration of risk.

A

the risk of having all people in one place and having to pay that out. (think twin tower incident)
- some insurers then place caps on buildings/address/zip codes.

57
Q

The choice to use auto reinsurance would be within a life carriers’ retention limit, and this can have merit for multiple reasons, name 3.

A
  1. spreads the risk on a per life basis for business u/w absent normal underwiting requirements.
  2. spreads the risk on a group basis reducing the impact of a catastrophic event
  3. provides additional capacity on a per location besis for business that might have otherwise exceed the carrier’s concentation-of-rosk- limit.
58
Q

What are some differences that may be noted between a treaty for a reinsurance business and that of an individual fully underwitten business?

A
  1. lower per life automatic binding limits
  2. agreed upon multiplers per life, dependingn on the group
  3. agreed upon paramaters of group case characteristics that permit automatic vs. facultative submission.
  4. per location concentration-of-risk limits
  5. definiftion of location
  6. stacking limits
59
Q

Define an aggregated funding method

A

a method whereby the necessary contributions for a plan are claculated for the entire group of plan participants

60
Q

Define a Bank-Owned Life insurance plan (BOLI)

A

the insurance purchased and owned by a bakn to be used to offset a variety of pre-retirement and post-retirement employee benefit obligations.

61
Q

Define a “defined benefit pension plan”

A

plan that provides for a specified montly benefit at retirement.
- can calculte a benefit through a plan formula that consideres such factors as salary and service.

62
Q

Define a “defined contribution pension plan”

A

a plan in which the employee or the employer or both contribute to the employees individual accound under the plan, sometimes at a set rate.
- Eg 401(k) plans and employee stock onwership plans

63
Q

What is an employee stock ownership plan (ESOP)

A

A form of defined contribution plan in which the investments are primarily in employer stock

64
Q

What is an executive bonus plan?

A

a plan whereby an employee owns a life insurance policy that was purchased, all or in part by the employer.
also known as- employee bonus plan or section 162 bonus plan.

65
Q

what is “internal Rate or Return” (IRR)

A

the average rate earned by each and every dollar invested during the period.

66
Q

What influences the rate of Internal rate of return>

A

the movement in financial markets
decisions by portfoliol managers
timing and size of the cash inflows and outflows and the beginning and ending book or market values.

67
Q

What are multiples?

A
  1. set amounts of death benefits expressed in thoussands of dollars that are multipled by the number pf plan participants to determine the max amount of death benefit available on any one life.
68
Q

Trur or false. Typically as the number of plan participants increases, the multiple used also increases in some stepped fashion with an ultimate cap on the max amount of death benefit?

A

Tue

69
Q

What are private placement insurance products?

A

nonregistered life insurance products only available to a qualified purchaser.

70
Q

What is considered a qualified purchaser?

A

an individual with at least 5M in investments or a corporation or trust with at least 25M in investments, excluding employee benefit plans

71
Q

What is the act of Stacking?

A

a legal term referring to using the limits of multiple policies to one claim or event.

72
Q

What is the act of Stacking?

A

a legal term referring to using the limits of multiple policies to one claim or event.

73
Q

Reinsurance treaties typically permit stacking up to how many times on a given group?

A

3.

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