ALU 202 EVALUATION TEST QUESTIONS AND
ANSWERS SET A+
✔✔Non-voluntary plan designs - ✔✔those in which plan participation is compulsory and
the amount of life insurance to be placed on each life is fixed.
✔✔Voluntary plans - ✔✔- are not as protected from anti-selection by their plan design.
- The proposed insured has a choice of whether or not to participate is highly selective.
✔✔Eligibility can be based on - ✔✔can be based on title, salary, equity ownership, or
some other definable measures.
✔✔A guaranteed issue plan for executives based on a simple multiple of salary
provides the insurer with reasonable assurance that the program - ✔✔will not be subject
to anti-selection and that the mortality costs will not be higher than expected, despite
the absence of any individual underwriting.
✔✔Reasons for potential adverse mortality in GI plans include - ✔✔- A greater amount
of coverage generally tends to be on the older lives simply because, on average, they
have acquired higher positions and salaries due to longer employment.
- The number of very highly compensated company executives is typically made up of a
very small group of lives.
✔✔Spread of Risk - ✔✔relates to 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.
✔✔Aggregate-Funded Plan Design - ✔✔the employee can allot any amount of salary
they wish within the constraints of the employer's plan.
✔✔Tiered Plan Design - ✔✔those where amounts of insurance vary by title or salary
groupings. It also has no individual selection.
,✔✔Employer-paid but individually-owned plans, such as 162 executive bonus plan -
✔✔are least favorable designs from an underwriting perspective.
✔✔One key difference with COLI and BOLI with respect to CHOLI and FOLI is - ✔✔the
lack of employer/ employee relationship. There is little or no control over who is and
who is not insured because the charity cannot mandate participation in the plan.
✔✔Bundle Underwriting - ✔✔is full underwriting with one difference. One or more
modestly substandard risk can be accepted at standard pricing in order to avoid the
problems that arise with having to rate a risk.
✔✔Simplified Issue (SI) - ✔✔always entails an abbreviated form of underwriting with
less evidence required than full underwriting, but there are differing approaches.
✔✔An alternate approach to SI - ✔✔starts with an abbreviated app. Rather than
accepting or rejecting solely on that basis, an underwriter can secure physician records
and offers can include ratings as needed, while declinations are generally kept to a
minimum.
✔✔Guaranteed Issue (GI) Pros - ✔✔- The most desirable method of underwriting for
the producer, client and insurer.
- the least expensive and most efficient and expeditious method of underwriting groups
of lives.
-the least inconvenience to the client and insureds and assures the highest level of
accepted lives.
- provides the most assured favorable outcome for the producer, and provides the
prospects of a win-win situation for all parties.
- a conditional guarantee. The condition typically is that the eligible participant must be
actively at work, not on disability, retired or otherwise terminated from employment.
✔✔Non-Qualified Executive Compensation Plans - ✔✔are the most prevalent form of
multi-life sales.
✔✔Most Common Form of Non-Qualified Executive Compensation Plans - ✔✔-
Deferred compensation plans
- Supplemental executive retirement plans (SERPs)
- Section 162 bonus plans
- Equity repurchase plans
✔✔Supplemental Executive Retirement Plans (SERPs) - ✔✔are the most favorable
plans after deferred compensation.
✔✔Section 162 Bonus Plan - ✔✔this benefit is paid for by the employer for key
employees, is considered a bonus for compensation purposes.
, ✔✔SERP Details - ✔✔- Participation is motivated by the desire to maximize one's
income in retirement while minimizing taxation.
- It is not the death benefit the insured is interested in, but the cash value that will help
fund the executive's retirement.
- The employer is typically the owner and payer.
✔✔Select Period - ✔✔refers to the number of years following the underwriting of the
policy that enjoys the most favorable mortality experience as a consequence of the
underwriting.
✔✔Equity Repurchase Plans - ✔✔are where the company will have a future obligation
to repurchase executives' ownership stakes in the company.
✔✔Qualified Pension Plans - ✔✔-Multi-life underwriting can be used in qualified
pension plans.
-Can be required to cover all employees.
-For ease of enrollment, since all employees are to be insured, GI is the desired form of
underwriting.
✔✔Executive based plans - ✔✔in which the objective is to maximize cash value can
use a universal life, a variable life, or whole life product and can be the same products
that are used in individual life sales.
✔✔Private placement products - ✔✔are non-registered products that are designed to
be attractive investment vehicles that still enjoy the tax advantages of more traditional
forms of life insurance.
✔✔Marketing of COLI and BOLI - ✔✔-tends to be an area of specialization. Producers
who sell individual life tend not to sell these.
-Marketing starts with the producer who is selling to the employer, not usually the
employees.
✔✔External Forces that have a significant impact on multi-life plan marketplace include
- ✔✔- Insurer financial ratings
- Interest rates
- Regulatory environment
✔✔Multi-life business can be reinsured on - ✔✔on an automatic and/or facultative
basis.
✔✔Aggregate Funding Method - ✔✔is a method whereby the necessary contributions
for a plan are calculated for the entire group of plan participants.
ANSWERS SET A+
✔✔Non-voluntary plan designs - ✔✔those in which plan participation is compulsory and
the amount of life insurance to be placed on each life is fixed.
✔✔Voluntary plans - ✔✔- are not as protected from anti-selection by their plan design.
- The proposed insured has a choice of whether or not to participate is highly selective.
✔✔Eligibility can be based on - ✔✔can be based on title, salary, equity ownership, or
some other definable measures.
✔✔A guaranteed issue plan for executives based on a simple multiple of salary
provides the insurer with reasonable assurance that the program - ✔✔will not be subject
to anti-selection and that the mortality costs will not be higher than expected, despite
the absence of any individual underwriting.
✔✔Reasons for potential adverse mortality in GI plans include - ✔✔- A greater amount
of coverage generally tends to be on the older lives simply because, on average, they
have acquired higher positions and salaries due to longer employment.
- The number of very highly compensated company executives is typically made up of a
very small group of lives.
✔✔Spread of Risk - ✔✔relates to 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.
✔✔Aggregate-Funded Plan Design - ✔✔the employee can allot any amount of salary
they wish within the constraints of the employer's plan.
✔✔Tiered Plan Design - ✔✔those where amounts of insurance vary by title or salary
groupings. It also has no individual selection.
,✔✔Employer-paid but individually-owned plans, such as 162 executive bonus plan -
✔✔are least favorable designs from an underwriting perspective.
✔✔One key difference with COLI and BOLI with respect to CHOLI and FOLI is - ✔✔the
lack of employer/ employee relationship. There is little or no control over who is and
who is not insured because the charity cannot mandate participation in the plan.
✔✔Bundle Underwriting - ✔✔is full underwriting with one difference. One or more
modestly substandard risk can be accepted at standard pricing in order to avoid the
problems that arise with having to rate a risk.
✔✔Simplified Issue (SI) - ✔✔always entails an abbreviated form of underwriting with
less evidence required than full underwriting, but there are differing approaches.
✔✔An alternate approach to SI - ✔✔starts with an abbreviated app. Rather than
accepting or rejecting solely on that basis, an underwriter can secure physician records
and offers can include ratings as needed, while declinations are generally kept to a
minimum.
✔✔Guaranteed Issue (GI) Pros - ✔✔- The most desirable method of underwriting for
the producer, client and insurer.
- the least expensive and most efficient and expeditious method of underwriting groups
of lives.
-the least inconvenience to the client and insureds and assures the highest level of
accepted lives.
- provides the most assured favorable outcome for the producer, and provides the
prospects of a win-win situation for all parties.
- a conditional guarantee. The condition typically is that the eligible participant must be
actively at work, not on disability, retired or otherwise terminated from employment.
✔✔Non-Qualified Executive Compensation Plans - ✔✔are the most prevalent form of
multi-life sales.
✔✔Most Common Form of Non-Qualified Executive Compensation Plans - ✔✔-
Deferred compensation plans
- Supplemental executive retirement plans (SERPs)
- Section 162 bonus plans
- Equity repurchase plans
✔✔Supplemental Executive Retirement Plans (SERPs) - ✔✔are the most favorable
plans after deferred compensation.
✔✔Section 162 Bonus Plan - ✔✔this benefit is paid for by the employer for key
employees, is considered a bonus for compensation purposes.
, ✔✔SERP Details - ✔✔- Participation is motivated by the desire to maximize one's
income in retirement while minimizing taxation.
- It is not the death benefit the insured is interested in, but the cash value that will help
fund the executive's retirement.
- The employer is typically the owner and payer.
✔✔Select Period - ✔✔refers to the number of years following the underwriting of the
policy that enjoys the most favorable mortality experience as a consequence of the
underwriting.
✔✔Equity Repurchase Plans - ✔✔are where the company will have a future obligation
to repurchase executives' ownership stakes in the company.
✔✔Qualified Pension Plans - ✔✔-Multi-life underwriting can be used in qualified
pension plans.
-Can be required to cover all employees.
-For ease of enrollment, since all employees are to be insured, GI is the desired form of
underwriting.
✔✔Executive based plans - ✔✔in which the objective is to maximize cash value can
use a universal life, a variable life, or whole life product and can be the same products
that are used in individual life sales.
✔✔Private placement products - ✔✔are non-registered products that are designed to
be attractive investment vehicles that still enjoy the tax advantages of more traditional
forms of life insurance.
✔✔Marketing of COLI and BOLI - ✔✔-tends to be an area of specialization. Producers
who sell individual life tend not to sell these.
-Marketing starts with the producer who is selling to the employer, not usually the
employees.
✔✔External Forces that have a significant impact on multi-life plan marketplace include
- ✔✔- Insurer financial ratings
- Interest rates
- Regulatory environment
✔✔Multi-life business can be reinsured on - ✔✔on an automatic and/or facultative
basis.
✔✔Aggregate Funding Method - ✔✔is a method whereby the necessary contributions
for a plan are calculated for the entire group of plan participants.
