1 Appendix C-1 SURVEY OF MAIN LIFE-INSURANCE PLANS The survey below describes types of life insurance plans that Israeli insurance industry offers today, with greater focus on and expand discussion of what we consider the plans. Definitions Insurer an entity that holds an insurer s license. Insur a person whose life is insur and whose name appears on the policy as the insur. Beneficiary the person entitl to insurance proces after an insurance event, in accordance with the terms of the policy. Policyholder a person, group of people, or corporation, who/which concludes an insurance contract with the company and is list on the policy as the policyholder. Policy a contract that spells out the terms of insurance, the offer, and any rider attach thereto. Insurance benefit the amount stipulat in the policy that the company shall pay after an insurance event. Surrender value the amount to which the policyholder/the insur is entitl in the event of surrender of the policy (available only in policies that include savings) before the end of the insurance period. Premium payments that the policyholder remits to the company in consideration of the company s undertakings as set forth in the policy. Basic plan a main insurance plan to which riders may be attach. Rider an insurance plan attach to the basic plan, such as risk, accidental death, and accidental disability. Rate the cost of insurance, express in mil of the insurance benefit. Underwriting surcharge a surcharge collect from the insur in addition to the original rate, due to substandard risk.
2 1. LIFE INSURANCE WITHOUT SAVINGS COMPONENT Term Risk/Death Insurance This form of life insurance, without a savings component, covers death only during the term stipulat in the policy. If the insur dies during the insurance period, beneficiaries receive a pretermin sum. The insurance period ranges from one year to several years but does not extend beyond age sixty-five (or, in certain cases, seventy). Premium Payment Options 1. Level premium throughout the insurance period. 2. Adjustable premium the rate changes to reflect the change in average risk, which rises with age. Notably, only the rate changes; the mical underwriting is not rone. The adjustment may be made annually or once every five, ten, twelve, or fifteen years. Insurance rates have come down recently because of the transition to annually adjustable rates, in contrast to a level rate or the costlier alternative of adjustments once every five years or more. Kinds of Insurance Available 1. Basic plan acquir by the insur. 2. Rider to the basic plan acquir by the insur. 3. Rider for a spouse to the insur s basic plan. In other words, if one spouse has basic insurance, in some situations it is more expensive to cover an additional insur than to cover the main insur, because there is a surcharge for the cessation of premiums after the death of the main insur. In this case, the additional insur continues to be cover without paying a premium. Some insurance companies use three factors for differentiation of the insurance rate at a specific age: 1. Smokers pay a higher rate than non-smokers.
3 2. Men pay a higher rate that women, because women have a longer life expectancy. The women s rate is identical to the rate paid by men three years younger. 3. The greater the insurance benefit, the lower the relative insurance rate. Decreasing Risk Insurance The insurance benefit declines during the insurance period and the premium changes commensurably. This type of insurance is suitable mainly in mortgage remption insurance. (Since the outstanding portion of the loan diminishes during the insurance period, the insurance benefit decreases commensurably.) Premiums are usually paid for less than the full insurance period. Family Income Insurance If the insur dies before the end of the insurance period, beneficiaries receive a monthly benefit until a pretermin time (the end of the insurance period). The main purpose of this insurance is to assure the beneficiaries a regular monthly benefit to cover current expenses. The structure of this policy is such that, the longer the insur lives, the shorter the term in which beneficiaries receive compensation. If the insur remains alive at the end of the insurance period, he or she is not entitl to a refund of premium. This insurance is usually sold as a rider, in which the premium term is usually shorter than the insurance period. Whole-Life Insurance This insurance provides coverage up to age ninety-five (whole-life). The insurance benefit is paid after the death of the insur irrespective of his/her age upon death. In this plan, the insur pays premiums all of his/her life, but there is an option of paying premiums until age sixty-five and being exempt afterwards even though the insurance remains in effect. In most cases, the coverage remains in effect after age ninety-five because the risk is negligible. 2. INSURANCE PLANS WITH SAVING COMPONENTS Endowment Insurance This was the most common form of life insurance until the mid-1980s. It pays benefits in the event of death (up to age sixty-five) and accrues savings. Its purpose is not only to assure an
4 insurance benefit for beneficiaries but also to accrue savings if the insur remains alive at the end of the insurance period. The insurance benefit is paid in one of two cases (whichever occurs earlier): 1. Upon the death of the insur during the insurance period. 2. At the end of the insurance period. The proces at the end of the insurance period and upon the death of the insur during the insurance period are usually identical. The insurance is compos of decreasing term insurance and increasing savings. (As time passes, this means that more savings are accru and that the sum at risk declines.) The two components together add up to the insurance benefit. Endowment Insurance to Fix Period This insurance creates savings for the beneficiary that matures when he or she reaches a certain age. If the insur dies before reaching that age, the insurance benefit is paid in any event of death or non-death only at the end of the insurance period, unlike endowment insurance (in which the proces are paid even if the insur dies). If the insur dies during the insurance period, payment of premiums is discontinu. Pension Insurance This kind of insurance plan distinguishes between two periods of time: 1. The first period begins when the insurance contract is sign and lasts until retirement age. (The insur pays premiums to accrue savings from which a pension will be paid.) 2. The second period begins in the month in which the insur starts to receive a monthly pension at which time he or she is term a pensioner under the terms set forth. The insurance company undertakes to pay the pensioner a monthly pension at a pretermin level from a pretermin time until the end of the pensioner s life (and, in certain cases, until the end of the beneficiary s life). If the insur dies after the pension began, his/her survivors are assur a minimum of 120 pension payments (up to ten years from the first pension payment receiv). Pension insurance is not popular because the benefits are taxable. Different mortality tables are us in pension policies than in endowment and term insurance, because insurance companies assume that the target population for pension insurance plans is relatively healthy.
5 Table C-10 Pension Plans Type of pension Pension A Pension B Pension C Pension D How premiums are paid Periodic Periodic Lump sum Lump sum Pre-pension insurance None Available None None coverage Onset of pension payments Deferr Deferr Deferr Immiate In a deferr pension plan, one may choose, up to a year before the end of the insurance period, one of several ways of receiving pension payments. This possibility is offer in order to meet nes that become apparent shortly before the pension is to be receiv, of which the insur was not aware when he/she purchas the insurance. Up to one year before pension payments begin, the insur may choose among ways of receiving pension payments other than the option he/she chose at the beginning of the insurance or the default option had he/she had not chosen another option. The different options are as follows: 1. The insur acquires coverage for him/herself up to death and may choose to assure a minimum of sixty pension payments. This option increases the pension sum slightly. 2. If the primary insur decides to waive the minimum of 120 pension payments, he/she can, in return, increase the current monthly pension. 3. The pensioner receives a pension for life and, in the event of death, the beneficiaries receive a lump sum equivalent to twenty-five pension payments. This lowers the current pension payment by factoring in a sum of permanent insurance. 4. The pensioner receives a monthly pension for the rest of his/her life, and after death the spouse receives a monthly benefit for the rest of his/her life. This ruces the original pension sum. Adif Insurance Personal This policy was introduc in 1983 to provide an insur with a variety of possibilities in respect to premium for death risk and the savings components of the policy. It is the insur or the policyholder who determines how the premium is apportion.
6 The Adif plan was develop mainly because: 1. the insurance industry develop a consumer-orient approach in the 1980s; 2. the Adif plan is index to wage, unlike CPI-index insurance plans that, in years of inflation, creat taxation problems for both s and employers. The combin policy includes a pension and an insurance plan if death preces the onset of pension payments. this purpose, several elective programs are offer when the insur joins the plan and there is a possibility of switching programs. The four Adif programs available are list below: Program A (basic) 72 percent of premium is set aside for savings and 28 percent for risk. How are the risk and savings components structur? Each month, the insurance company examines the total premium paid and apportions it as indicat (28 percent risk, 72 percent saving). The share of risk in the Adif policy varies each year in accordance with the insur s age. By means of the risk premium, an insurance benefit is purchas as a function of the insurance rate, which rises in direct proportion to the age of the insur. In contrast, the savings sum increases with each passing month because the accrual is monthly. The insurance benefit that survivors receive after the insur s death is made up of two components: Insurance benefit + savings component = total insurance benefit in case of death If the risk rate increases more quickly than the pace of savings accrual (i.e., with each passing year, one may acquire less and less life insurance for the premium paid), then the insurance benefit becomes smaller than the sum in effect at the beginning of the policy term. This phenomenon an insurance benefit that becomes smaller than its original value is known in the insurance industry as the curve because the insurance benefit rises and falls during the life of the policy. The unavailability of level-benefit life insurance gave rise to additional Adif programs that aim, among other things, to solve the problem of the fluctuating insurance benefit during the term of the policy.
7 How is the risk rate structur? Most of the expenses in the policy are load onto the risk portion. (A small amount is load onto the savings portion.) This is the main reason why the risk component of Adif policies is so expensive. Program B (level insurance benefit) -- In response to the aforemention curve phenomenon, the second program assures beneficiaries a level insurance benefit when the insur dies. How the sum is determin the insur is entitl, as stat, to set the insurance benefit at a given level (say, NIS 100,000). To maintain this level, the insurance company carries out several actions on a monthly basis: 1. Examining the existing insurance ratio (say, 72 percent savings, 28 percent risk) and determining the insurance benefit that the premium in this example purchases. 2. Examining the savings accrual component of the policy 72 percent in this example. 3. Totaling the insurance benefit acquir by the basic premium plus accrual of savings. 4. If there is a difference between the insurance benefit stipulat (NIS 100,000 in this example) and the aforemention total, the insurance company buys supplemental insurance (outside the Adif policy) for the insur in order to boost the insurance benefit to NIS 100,000. In our example: NIS 100,000 = accru savings + basic risk + supplemental risk When the accru savings reach NIS 100,000, the acquisition of risk insurance is discontinu. Program C (insurance benefit as a multiple of insur s salary) - This program is available in executive insurance plans only. Its logic is that since the beneficiaries standard of living is a function of the insur s wage, a pretermin number of monthly paychecks may meet the insurance ne precisely. Therefore, the insurance benefit varies with the ups and downs of the insur s wage.
8 Program D ( saving-only ) - This program has no insurance element. Its underlying logic is that the insur has no ne for life insurance. In practice, insurance companies seldom offer insurance of this type. Additional Options in Adif Policies 1. Extra coverages such as supplemental term, accidental death, and disability. 2. Conversion of a monthly pension, schul to start on a pretermin date, into a lump sum before the end of the insurance period (available in personal insurance but not in executive insurance). 3. Deposit of a single premium for saving only, with no insurance element. EXECUTIVE INSURANCE PLANS Types of Executive Plans Executive insurance plans protect s at point of retirement, dismissal, or death. The insurance is bas on an employer- relationship and on contributions by both sides (severance pay and benefits) to cover the premium. The premium is meant to cover death, disability, loss of working capacity, etc. The main component is retirement saving. Executive insurance plans are divid into two main types: 1. for s; 2. for salari corporate s. An executive in a partnership is an under the following conditions: a. The employer is a partnership controll by no more than five persons. b. The executive () is a if, directly or indirectly, singly or in conjunction with a relative, he or she owns one of the following: 10 percent of issu share equity or at least 10 percent of voting rights. the right to at least 10 percent of earnings. the right to appoint an executive.
9 c. An is a member of a partnership if he is a who, singly or in conjunction with his wife, owns at least 5 percent of issu share equity or voting rights, the right to hold or acquire either of these, or the right to receive earnings, provid that spouse s rights acquir before marriage or by inheritance are not taken into account for this purpose. Only if these three terms are met can executive insurance for s be written. Otherwise, only an ordinary executive insurance plan is allow. Conventional Executive Insurance Plans Two kinds of executive life insurance plans are offer: 1. Executive insurance sold under names such as Adif, Yoter, etc., in which the premium is adjust each month commensurate with the insur s wage and changes only when the salary changes ( wage-index executive insurance). 2. Executive insurance in which the premium is adjust commensurate with increases in the Consumer Price Index ( CPI-index-premium executive insurance). In the wage-index type, the monthly premium is divid into two parts: 1. A given percent of the premium is us to purchase risk insurance commensurate with the insur s age. 2. The rest of the premium is us for cumulative saving. The monthly premium is bas on a percent of the insur s monthly wage; the basic insurance benefit is comput each month commensurate with the premium earmark for this insurance (the basic premium) and the age of the insur that month. The surrender values of the policy in the case of discontinuation of work are almost equal to the rate of accru saving 70/72 of accru saving is paid in Year 1, 71/72 in Year 2, and 72/72 in Year 3. CPI-index-premium executive insurance is an endowment policy or a pension policy to age sixty-five or seventy (or, in the case of women, to age sixty). To discuss these policies, one must keep two separate periods of time in mind: policies written through the end of 1990 (CPI-index) and those written on or after January 1, 1991 ( participating policies, which participate in earnings on the investment portfolio), in which the premium is index to the CPI and the savings are invest by means of the portfolio.
10 Components of Executive Insurance Plans 1. Basic insurance compos of one plan or several plans. 2. Supplemental insurance the insur may buy extra insurance for death, accidental death, and disability and survivors pension. 3. Disability insurance in most cases, the employer pays the premium for this coverage. However, in the absence of an agreement, the may purchase this insurance out of his/her payments on account of the plan. Payments for Executive Insurance Executive insurance is bas on three types of contributions: 1. Employer s contribution for severance pay and benefits and s contribution for benefits. 2. Employee s contribution for severance pay and s complementary contribution for benefits. 3. Benefits-only contribution from both employer and. Employer s Payments 1. current severance pay. 2. benefits. 3. disability insurance. 4. To make up a shortfall in CPI-index executive insurance following an increase in the CPI. 5. To make up a shortfall in wage-index executive insurance pursuant to an increase in salary. Employee s Payments for Benefits Employees must at least match their employers payments. This is because the employer ordinarily contributes 5 percent of wage and the participates at an identical rate. The standard premium in executive insurance, in most cases, is percent of the insur s wage, as itemiz below (percent):
11 Employer s contribution for severance pay 8.33 Employer s contribution for benefits 5.00 Total employer s contributions Employee s contribution for benefits 5.00 Total contributions The employer usually contributes another 2.5 percent to cover disability insurance. According to Paragraph 45a of the Income Tax Ordinance, s receive a tax crit (refund) of 25 percent for their contributions for benefits up to a qualifying income ceiling. Possible Types of Executive Insurance Plans In several situations, executive insurance may be written on the basis of severance pay only: 1. when there is no agreement concerning contributions for benefits; 2. when contributions for benefits are deposit with a provident fund; 3. when the belongs to a pension fund and participates in a basic-pension program only, in which only contributions for benefits are made to the pension fund. In this case, the severance-pay component may be contribut to a pension or benefits policy. In two situations, executive insurance plans written on the basis of benefits only: 1. when the employer has already made a contribution to a severance-pay fund; 2. when, for various reasons, the employer is not interest in giving the the sums contribut to the severance-pay fund. Special Conditions in Executive Insurance: Executive insurance comes with additional special conditions, depending on various executive-insurance plans as insurance funds : 1. The policy must be subject to the Income Tax (Rules for Management and Approval of Provident Funds) Regulations and the guidelines deriv therefrom. 2. The policy must comply with a specimen policy present to the Income Tax Commission at the time the application for insurance fund approval is submitt.
12 3. The policy must be drawn up in such a way as to distinguish between contributions for severance pay and contributions for benefits. 4. The policyholder must be the employer; if the participates in paying the premium, it shall be co-own. 5. Coverage of death risk is taken out of the benefits account only. 6. The policy may not be plg except to allow the to receive a policy loan. 7. The may not receive any proces from the policy before the discontinuance of his/her work. 8. The beneficiaries in the case of death must be the s survivors (with respect to the severance-pay portion only). Special Conditions in the Case of Discontinuance of Work Since executive insurance is on account of severance pay, special conditions apply in the event of discontinuance of work: Before Retirement Age - 1. The insurance moneys may be transferr to a new workplace to maintain continuity of coverage. 2. If the insur cannot find a new workplace, he/she may apply to convert the policy into risk-only (for a term no longer than thirteen months). 3. If the insur leaves his/her workplace within the first ten years of a CPI-index insurance policy, he/she may to convert the endowment insurance into whole-life insurance for a benefit not to exce the insurance that had been in effect. 4. The policy may be transferr to the ownership of the insur. 5. If the insur has become a, the policy shall be transferr to the ownership of a partnership. 6. The policy may be surrender, partly or fully. 7. The policy may be convert into a paid-up policy (in endowment or pension insurance only).
13 At Retirement Age - In the case of an endowment policy, the insurance benefit is made available to the insur. If the insur reaches the end of the insurance period, he/she is allow to convert the endowment plan into whole-life with no premium due and without having to provide new evidence of state of health. This option may be exercis only if an application to this effect is present to the insurance company several years before the end of the insurance period.
14 Appendix C-2 REPORTING TO THE INSURED EXPLANATION OF THE ANNUAL REPORT Annual reporting to the insur is determin in the Control of Insurance Transactions (Terms of Insurance Contracts) (Amendment) Regulations, The main purpose of annual reporting is to create a concise reporting format that will provide the insur with a review of existing plans, their coverage, and their surrender values, if any. The report is sent to the insur s home each year by the end of March, and the data in the report are correct as of the December 31 immiately precing the reporting date. Below, to explain the meaning of the data in the annual report, we define the main terms and concepts which, if properly understood, may make the report much easier to read. Identifying details of insur insur s name and ID number. Details of insurance plan policy number, type of plan (executive, personal, etc.), type of basic insurance, e.g., endowment, Adif, pension, risk. Method of payment monthly, quarterly, annually. Indexation method life-insurance policies are usually index to wage, the Consumer Price Index, or the Cost of Living Adjustment. CPI-index policy in a policy of this kind, the premium varies commensurate with changes in the Consumer Price Index. Since the insurance benefits and the accru savings use the same indexation base as the premium, these sums also change commensurate with the CPI. COLA-index policy executive policies in which the premium is a function of the insur s wage. The indexation base in this policy is the Cost of Living Adjustment as is given. As the COLA increases, the wage insur by the policy increases at an identical rate. Therefore, the premium also rises at the rate of the increase in wage. Wage-index policy executive policies in which the premium is a function of the insur s wage. The indexation base in such a policy is the s wage. Insofar as the wage increases, so does the premium, and vice versa if the wage decreases.
15 Premium paid in tax year the total premium paid on account of and employer (in an executive insurance policy) in the reporting year. In a personal policy, this clause refers to the total premium paid by the policyholder in the reporting year. Coverage in case of death the insurance benefit ow to the beneficiaries after the insur s death. Benefits at end of saving term saving accru up to age sixty-five, assuming that premiums are fully paid until point of retirement (age sixty-five). There is a distinction between two main types of policies: Endowment policy in this policy, the accru savings values are equal to the periodic premiums paid by the insur and/or the policyholder, increas by the net investment income, less the cost of the insurance (risk) component. In these policies, the insurance benefit and the savings benefit at point of retirement are equal. Adif/Meitav/Meiniv/Yoter/Yevul policy this policy treats the life-insurance component and the savings component separately. In other words, for every sheqel of premium, x% is earmark for saving and (1-x)% is earmark for life-insurance. An example is a default mix, in which if 72 percent is earmark for savings then 28 percent is reserv for life-insurance. Different mixes may occur, such as 85:15, 90:10, etc. Percent of premium earmark for saving the total contribution to saving, express in percent of the premium paid. Reemable sums vs. accru (nonreemable) savings part of the premium earmark for saving has a remption (surrender) value. This means that if the insur and/or the policyholder paid into an executive policy at NIS 1,000 per month for two years, the share to which the insur shall be entitl upon surrender will be smaller than 100 percent of his/her deposits for saving. This separates the accumulation of savings (nonreemable) from surrender values that are smaller than the savings accumulat (reemable). Itemization of payments and receipts in reporting year an itemiz list of premium payments, with reference to the s share and (in an executive policy) the employer s share or, in the case of a personal policy, the total premium paid. The itemization is set forth on a monthly basis.
16 Income Tax Confirmation The total premium allow for duction or crit, distribut by various types of tax statutes. Depending on the various tax benefits that life-insurance policies provide, one may benefit from a duction or a crit. Duction ruction of the premium payer s tax liability. Crit a refund from the tax authorities at 25 percent of the total premium recogniz under Paragraph 45 of the Income Tax Ordinance. Information about the investment portfolio in a participating policy 1. Gross and net yields under the investment conditions in effect until 1992, i.e., assur-yield earmark bonds. 2. Gross and net yields under the investment terms in effect since 1992, i.e., participating policies. In each of these tracks, the insurance company lists the assets in which it invest. The data are present in the form of various cross-section graphs. Definitions: Gross yield real yield including management fees. Net yield real yield net of management fees.
17 Appendix C-3 COMPARISON OF PARTICIPATION-TYPE EXECUTIVE INSURANCE PLANS (WITH INSURANCE COMPANIES) WITH COMPREHENSIVE PENSION (WITH NEW PENSION FUNDS) AND PROVIDENT FUNDS Subject Comprehensive pension Executive insurance Benefits and severance-pay provident funds 1. Existing types of benefit plans 2. Yield on funds invest Comprehensive Comprehensive Comprehensive The comparison is bas on the weight average that the fund earn on its investments. 3. Retirement savings Savings at retirement age are paid out in the form of a pension. Non-pension withdrawals from the fund are perform on the basis of a surrender-value formula. A member who becomes eligible for a pension but whose pension is smaller than the minimum pension stipulat in the fund s Adif, integrat, pension Adif, integrat, pension Adif, integrat, pension The funds are invest in the capital market; the yield is determin by the company s investment performance. Policies are bas on a forecast real net yield of 2.5 percent, but since the policy participates in profits and losses on investments in the capital market, the insurance benefits (savings) may vary commensurably. Retirement savings are a function of the type of insurance plan: Integrat Retirement savings are defin as a lump-sum benefit paid to the insur upon retirement. Adif Retirement savings are paid out in the form of a monthly pension until the death of the (retir) insur. Benefits, severance pay Benefits Employer Central severance-p ay Funds are invest in the free market; the yield is determin on the basis of the fund s investment achievements. The benefit is obtainable in two ways: as a lump sum and as several sums (not necessarily identical). In any case, the member is not paid a benefit that exces the sum accru in the fund.
18 Subject Comprehensive pension Executive insurance Benefits and severance-pay provident funds Employer statutes receives the sums accru in his/her account at improv surrender values (at interest up to 3.5 percent). One may obtain a discount sum not to exce 25 percent of the monthly old-age pension for up to the first five years after retirement, provid that the pension paid to the member after discounting is not smaller than the minimum wage. Alternatively, the accru savings may be reem (i.e., the policy s surrender value) before the policy matures in the natural way (retirement). In this case, the benefit is a nonrecurrent (capital) sum. 4. Insurance coverage in case of death ( survivors ) Survivors benefit only. If the benefit to which the survivors are entitl is smaller than the minimum pension stipulat in the fund s statutes, survivors receive the money accumulat in the deceas member s account at improv surrender values. Single payment after the death of the insur. There is a possibility of adding survivors pension coverage at an extra premium, so that when the insur dies the survivors will receive the survivors benefit in addition to a death benefit. Some provident funds include group life insurance, which is limit by regulations to a stipulat ceiling. Group life insurance should be view as complementary to main insurance. 5. Disability (loss of working capacity) insurance (a) Definition of coverage (insurance event) The comprehensive pension plan includes a disability benefit. A disabl person is one whose working capacity is impair for a period of at least three months and, consequently, is unable, because of his/her physical or mental state of health, to continue working at his/her job or in any other appropriate job without suffering impairment to his/her state of health, all of which as determin by a One may purchase supplemental coverage (as a rider to the policy) that considers the insur totally incapacitat if, for reason of illness or accident, he/she is depriv, to at least a 75 percent extent, of the ability to continue practicing the profession or occupation practic until the insurance event (illness or accident), and pursuant to which he/she is unable to engage in any other reasonable occupation that corresponds to his/her A small share of provident funds have expand their insurance coverage to include disability, as long as it remains within the definition of group life insurance and conforms with the insurer s definitions. The coverage is usually for 100 percent disability.