Allocated and Unallocated Funding in Insurance Contracts
Insurance companies offer a variety of contracts either designed specifically for qualified plan funding or adaptable to it. In theory, an employer could negotiate a contract with the insurance company with provisions specifically tailored to the employer's needs. In practice, however, insurance contracts tend to fall into specific types, with some but not complete flexibility in their terms. This is partly a result of the fact that an insurance contract—particularly a life insurance contract—cannot be the subject of unfettered negotiation between insurer and contractholder. Often, the terms of the contract require state regulatory approval and, consequently, the insurer is not interested in varying them for each individual contractholder. Also, historical practices and needs in the insurance industry have determined the form of many of the contracts.
Insurance contracts used in funding qualified plans can be divided into allocated and unallocated types. When funding is allocated under an insurance contract, this means that the insurer has assumed the employer's obligation to pay specific benefits to specific participants. The employer is still primarily responsible, but under the terms of the insurance contract, participants and the employer can look to the insurance company for payment of specific amounts. With unallocated funding, the insurance company acts as a holder of the funds, much like a bank trustee. With unallocated funding, the insurance company is, of course, obligated to deal prudently with the funds, but it makes no guarantee that the funds will be adequate to pay any specific benefits under the plan. An insurance contract used in a qualified plan can be either purely allocated or purely unallocated, or can offer a mixture of both.
Insurance contracts can be classified—and will be discussed—in this order:
Allocated Contracts
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Individual life insurance or annuity contracts
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Fully insured plans
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Combination plans
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Group permanent contracts
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Group deferred annuity contracts
Unallocated Contracts
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Deposit administration contracts
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Immediate participation guarantee contracts
1 comments:
A liability insurance policy is not intended to provide policyholders a means to shift to the insurer their separate, voluntarily undertaken contractual obligations. Private company D&O insurance policies generally embody this principle in a separate exclusionary provision. However, the wording of the exclusionary clause can substantially affect the scope of coverage otherwise available under the policy. In particular, the expansive reading given certain exclusionary language in recent cases suggests that a more narrowly constructed exclusion would more appropriately address the concern that the provision was originally intended to address.
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