Life insurance companies offer considerable flexibility in tailoring a funding vehicle to meet individual employer needs. Life insurance companies are in the business of accepting risks, so they are willing to underwrite several different risks associated with pension plans, and to underwrite them in varying degrees, depending upon the employer’s wishes. Some of these risks are:
1. more individuals may live to retire than the mortality tables used anticipated.
2. Those who retire may live longer than the mortality tables used anticipated.
3. The rate of interest earned on investments may fall below the anticipated level.
Single Premium and Level Premium Annuity Contracts
Minimum Death Benefit Variable annuities
Minimum Death Benefit Variable annuities typically promise a guaranteed minimum death benefit (GMDB), which often equals the greater of the cash value or the amount invested in the contract, if the annuity owner dies during the accumulation period. Some insurers offer a “ratchet” GMDB wherein a new minimum death benefit is established periodically or the benefit equals the premiums accumulated at a stated interest rate. Thus, assume the owner pays a premium of $10,000 into the contract, and the cash value escalates to $12,000 over the next two years. Under the traditional GMDB, if the owner dies, his or her beneficiary receives $12,000. If, on the other hand, the cash value declines to $8,000 because of poor investment results, and the owner
Life annuities with refund features
Regardless of questions of equity and technical soundness, most persons seem to oppose placing a substantial sum of money into a contract that promises little or no return if they should die shortly after income payments commence. Therefore, companies permit annuitants various so-called refund options if death occurs shortly after annuity payments have begun. In contrast to the situation with the pure life annuity, not the entire purchase price of refund annuities is used to provide income payments. Part of the purchase price is applied to meet the cost of guaranteeing a minimum amount of benefits, irrespective of whether the annuitant lives to receive them. Thus, for a given
What are Pure Life Annuities?
Broadly, life insurers offer annuitants two broad classes of life annuity payouts: pure and refund. With the pure life annuity, income payments continue for as long as the annuitant lives but terminate on the annuitants death or, with a temporary life annuity, at the end of the designated time period, if earlier. On the death of the annuitant, no matter how soon that may occur after the commencement of income, no further amounts are payable to the annuitants estate or to any beneficiary. With this annuity, the entire purchase price is applied to provide income to the annuitant, no part of it paying for any “refund” benefit. Thus, the pure life annuity provides the maximum income for a given annuity purchase price. Because of the high
What are Catastrophic Illness Coverage and Long-Term Care Coverage?
Catastrophic illness coverage provides for accelerated death benefit payments on approximately the same terms and conditions as terminal illness coverage, except that the insured must have been diagnosed as having one of several listed catastrophic illnesses. Also referred to as dread disease coverage, the provision typically covers stroke, heart attack, cancer, coronary artery surgery, renal failure, and similar catastrophic diseases. Both terminal illness and catastrophic illness coverage’s provide that policy death benefits are reduced on a one-for-one payout basis. Cash values are reduced on either a one-for-one basis or in proportion to the death benefit reduction. [Read more...]
