May 7, 2008

GROUP UNIVERSAL LIFE INSURANCE : Mortality Charges, Expense Charges, Interest Rates,

Mortality Charges
Most products have a guaranteed mortality charge for three years, after which the mortality charge is based on the experience of each particular group. As with experience rating in general, the credibility given to a group's actual experience is greater for larger groups. Most insurance companies guarantee that any future increases in the mortality charge will not exceed a stated maximum.

The products designed for small groups typically use pooled rates that apply to all groups insured through a particular trust. Therefore, the mortality charge for any employer will vary not with the employer's overall experience but rather with the overall experience of the trust.

Expense Charges
Among group life insurance products, probably the greatest variation occurs in expense charges levied. Typically, a percentage of each premium, such as 2 percent, is deducted for expenses. In addition, there is a flat monthly charge, normally ranging from $1 to $3, to maintain the accumulation account. Some insurance companies levy this charge against all certificate holders, even those who are contributing only enough to have the pure insurance coverage. Other insurance companies levy the charge only against those accounts that have a positive cash-value accumulation. A few insurance companies also load their mortality charges for expenses. Finally, many companies levy a transaction charge, such as $25, that often applies to withdrawals in early policy years. A transaction charge may also apply to policy loans and additional lump-sum contributions. In evaluating the expense charges of different insurers, one should remember that an insurer with a lower-than-average charge may be subtly compensating for this charge by having a higher mortality charge or crediting a lower interest rate to cash-value accumulations than would otherwise be paid.

Interest Rates
Insurance companies guarantee that the initial interest rate applied to cash-value accumulations will remain in effect for a minimum period of time, usually one year. After that time, the rate is typically adjusted quarterly or semiannually but cannot be below some contractual minimum such as 4 percent or 4½ percent. The interest rate credited is usually determined on a discretionary basis but is influenced by the insurance company's investment income and competitive factors. However, some insurers stipulate that it be linked to some money market instrument, such as three-month Treasury bills. In general, the same interest rate is credited to all groups that an insurance company has underwritten.

Premium Adjustments

Employees are allowed considerable flexibility in the amount and timing of premium payments. Premiums can be raised or lowered and even suspended. In the latter case, the contract will terminate if an employee's cash-value accumulation is inadequate to pay current mortality and expense charges. Of course, premium payments could be reinstated to prevent this from happening. Additional lump-sum contributions may also be made to the accumulation account.

Two restrictions are placed on premium adjustments. First, the premium payment cannot be such that the size of the cash-value accumulation becomes so large in relationship to the pure insurance that an employee's coverage fails to qualify as a policy of insurance under IRS regulations. Second, because changes in premium payments through payroll deductions are costly to administer, many employers limit the frequency with which adjustments are allowed.


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