Funding Solutions for Corporate Multi-Life Insurance Programs
Multi-Life Insurance offers corporate Sponsors an approach to provide broad-based benefits to its employees while protecting the Sponsor with cash-value life insurance on its high-value employees.By implementing a Corporate Multi-Life Insurance Program (CMIP), successful mid-sized and large corporations gain access to an effective tool for recruiting, retaining and rewarding their current and future employees.
- Setting up a multi-life insurance platform can provide employees an important benefit while protecting the Sponsor from the effects of the death of a key employee.
- In addition, a CMIP can be accretive to the Sponsor’s bottom line, as the cash value account within the insurance program grows. Sponsors can use low cost loans from the cash value account to fund capital improvement projects, pay valued employees a retirement benefit, or simply enhance their corporate balance sheet.
Advantages for Sponsors
- Options and solutions for ongoing corporate recruitment, retention and reward challenges
- Funding of valuable employee benefits via custom-designed plans (salary continuation for a period of time, defined benefit pension plans, buy-sell arrangements, deferred compensation, death benefits)
- Minimized financial impact on Sponsors; design of the plan maximizes funding efficiencies
- Policies' cash value growth is accretive to the Sponsor’s balance sheet – thereby becoming a corporate asset
- Insurance living and death benefits are optimized for the insureds and their beneficiaries
CMIP Structure and Guidelines
- Sponsor meets financial underwriting criteria asserted by the insurance carrier
- Initial insured account has 15 or more insured employees, each earning a minimum annual salary of $120,000
- Underwriting is available on either a “guaranteed issue” (no underwriting questions) or a “simplified underwriting” (limited underwriting questions) basis
- Initial amount of insurance per life as high as 10 times annual salary (up to a maximum amount), depending on the number of participants and the insurance carrier selected
- Highly compensated employees may qualify for additional fully underwritten key-man or other insurance coverage
CMIP Implementation Milestones
- Prospective Sponsor provides initial census of insured lives
- Carriers develop initial group policy illustrations and other financial projections
- If projections are acceptable to Sponsor, individual applications and insurance acknowledgement forms are received from Sponsor for each proposed insured employee
- Detailed individual and aggregate account projections are developed for Sponsor approval
- Sponsor forms new entity that will own and act as beneficiary of the insurance policies
- New entity obtains premium funding using one of the available CMIP strategies
Frequently Asked Questions
What criteria does the Sponsor need to satisfy to purchase a CMIP?
Sponsor must be financially sound, with a strong balance sheet and the ability to pay the insurance premiums or the interest on a premium funding transaction
Is the Sponsor required to notify covered employees that the company is purchasing life insurance on them?
Yes. Internal Revenue Code Section 101(j) currently provides that death benefits paid on an “employer-owned life insurance contract” will be tax-free only if, among other things, proper notice is given to the covered employee and the employee gives written consent to be insured before coverage is issued.
Are the insured employees required to undergo medical underwriting?
The need to medically underwrite depends on whether the CMIP pool of insureds is large enough to qualify for the guaranteed issue or simplified underwriting. The insurance will be aggregated, not matched to individual employee benefits. Therefore, we try to target our CMIP accounts for groups of at least 15 employees, and preferably 30 or more.
Why do companies institute CMIP programs?
Primarily to recruit, retain, and reward employees who have shown long-term loyalty to an employer. Companies can also choose to use CMIP for:
a) Competitive after-tax yields compared to other investments
b) Matching the long-term nature of benefit plan expenses
c) Acting as a hedge against benefit liabilities
d) CMIP death benefits can be used to help the company recover plan costs over the long term.
Do many companies have CMIP policies?
Many Fortune 1000 companies fund their Supplemental Executive Retirement Plan obligations with CMIP programs. CMIP programs are also popular with hospitals, medical health care groups, biotech companies, wealth management companies, consumer packaged goods companies, oil & gas companies, and companies that seek to recruit, retain and reward their employees for their long-term service.
How are typical CMIP insurance policies structured?
Most Sponsors purchase indexed universal life (IUL) insurance policies to fund the employment benefits associated with CMIP. The benefits the employees’ beneficiaries receive are usually vested over 5-10 years.
Does the Sponsor keep the life insurance policies when insured employees terminate or retire?
Yes. The coverage on each individual insured is part of an aggregate CMIP pool which finances a range of company benefit obligations for many employees. When an insured employee leaves the company, the CMIP may be retained to cover the liabilities the company still has to other employees. However, our programs can include a vesting schedule where the employees’ long-term service vests them into taxable benefits upon their death that are paid to their beneficiaries.
If a covered employee leaves the company, how does the employer know when the employee has died so that the death benefit can be properly paid?
To make sure death benefits are paid on a timely basis, insurers track covered employees in CMIP pools via the Social Security system.
What has been the general employee reaction to his or her company acquiring a CMIP?
Very favorable. Bear in mind, CMIP does not cost the employee anything and provides their beneficiaries with a benefit upon their death. Further, it can make their employer more financially viable and it is a plan that has been implemented by many of the country’s largest and most reputable companies. While an employee cannot be forced to participate in the CMIP pool, our experience is that the majority of eligible employees do choose to participate.
Do the employees receive any of the cash benefits from CMIP?
Technically, no. The CMIP benefits are paid by the insurance carrier directly to the Sponsor. However, depending on the level of their vesting and whether the Sponsor has structured the CMIP to pay a one-time benefit or as a salary continuation plan, the employees’ beneficiaries can receive taxable benefits from the Sponsor.
Will CMIP have an impact on a Sponsor’s financial performance?
In the short term, a Sponsor will likely be liable for a relatively small financial liability to start the CMIP. However, over time it is likely the CMIP may favorably impact a Sponsor’s financial performance as the cash value of the insurance policies becomes a growing asset on the Sponsor’s balance sheet.
Are CMIP insurance premiums deductible by a purchasing Sponsor?
No. However, CMIP premiums paid do result in an increase in the cash value of the underlying insurance policies, which can be an asset of the Sponsor.
What are the current rates of return under a CMIP?
The rates of return are a function of the type of insurance policies purchased, the riders and endorsements issued with the policies, and the insurance carrier’s declared interest crediting rates. Currently, the crediting rates of many of our CMIP insurance policies have a floor of 0% and a cap of between 12% and 17% per year.
Can a Sponsor access the cash values in a CMIP policy?
Yes. CMIP insurance policies allow the Sponsor owner to withdraw or borrow against the cash values and the policies can be surrendered at any time with the net cash value paid to the Sponsor.
What happens if the coverage is surrendered?
Upon surrender, the carrier pays the Sponsor the cash value of the CMIP insurance policies less any applicable surrender charge. Under current rules, the Sponsor will recognize a gain for income tax purposes on the amount of cash value received in excess of the sum of premiums paid. Before surrendering a policy, other alternatives should be reviewed, such as a tax-free (Section 1035) exchange.
Does it matter from which insurance carrier a CMIP policy is purchased?
Prior to any CMIP purchase, we carefully review the financial strength of each proposed carrier, as well as their track record in the market. Regardless of the product selected, the financial strength and reputation of a carrier is critical to the future viability and credibility of a CMIP program. Product costs also vary by carrier and among individual insurance products.
What is the effect of a company merger on CMIP policies?
Merger and acquisition activity has no direct impact on a CMIP’s plan performance. If the Sponsor is acquired, the CMIP can be an attractive balance sheet asset and may enhance the net worth of the Sponsor entity.
Information regarding the Corporate Multi-life Insurance Program is provided only to inform qualified corporate Sponsors of the availability of this program. This information is not an invitation or offer to purchase or to enter into a business agreement or transaction. Sponsor participation under CMIP requires the Sponsor to submit financial and other underwriting criteria in order to be considered for the program.
For more information about DGS' Corporate Multi-Life Insurance Programs, please contact:
John L. Schilhab
President & CEO Marketing & Business Development
San Antonio, TX
Larry Walters, ASA, DFCS
EVP - Admin, Operations & Chief Actuary